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Attorney General Lockyer Issues Preliminary Report on Gas Pricing in California

Vows to pursue merger reviews; Creates expert panel to develop policy recommendations
Monday, November 22, 1999
Contact: (415) 703-5837

(SAN FRANCISCO) – Attorney General Bill Lockyer today reported that the higher prices for gasoline in California are largely the result of the concentration and control oil companies have over the production and sale of gasoline, the state's decision to require clean-burning gasoline and its relative isolation from alternative fuel supplies.

"There are still a number of issues that ought to be analyzed in order to complete our investigation of gas pricing practices, but this comprehensive overview clearly underscores the need for California to review carefully any merger or acquisition to protect against the erosion of competition in an already concentrated and vertically integrated gasoline market,' Lockyer said in releasing the Preliminary Report to the Attorney General Regarding California Gasoline Prices.

"We are going to pursue the investigation of the petroleum industry and we are going to carefully scrutinize the pending mergers of Exxon-Mobil and BP-ARCO to see what we can do to restore more healthy competition,' Lockyer said. 'Our concern is that high gas prices in California are the result of low competition in the market.'

Lockyer added that the preliminary report shows that the California gasoline market raises issues needing attention not only through legal scrutiny of oil company practices by the Attorney General's Office and the Federal Trade Commission, but also by convincing public policymakers that changes are needed to avoid the kind of price spikes that hit California businesses and consumers earlier this year.

To address the policy issues, Lockyer said he will convene a working group of experts to develop recommendations for reducing California's vulnerability to refinery outages and resulting price spikes, and for changing free market forces to push down price spikes and increase competition. The group, which will include consumers, economists and other oil industry experts, will use facts and findings from the preliminary study in arriving at recommendations.

"In California, just six companies account for more than 90 percent of California's refining capacity, and these same six companies control more than 90 percent of the gasoline sold in California,' Lockyer said. 'The situation is different outside California. In Texas, by contrast, the top six refiners control less than 58 percent of capacity and under 34 percent of the gasoline sold. What the report offers is credible data and highlights matters deserving more attention.'

The following are highlights from the preliminary report by economists Keith Leffler, Ph.D., and Barry Pulliam, whose specialty is the petroleum industry. The report will be available for viewing at the Attorney General's home page http://www.ag.ca.gov

* FACTORS CONTRIBUTING TO HIGHER PRICES: (1) a relative lack of competition associated with the structure of the state's gasoline industry; (2) the state's clean-burning gasoline requirements and relative isolation from alternative supply sources; and (3) higher state taxes of 5¢ per gallon.

* PRICES - The experience of 1999 has made it clear that gasoline prices in California behave differently than prices in much of the rest of the U.S. Californians paid an extra $1.3 billion for gasoline from January to August 1999 as retail pump prices climbed to an average $1.317 with the April peak at 43 cents more per gallon than a year earlier. The U.S. average during the first eight months was $1.084, with Georgia offering the lowest price at $0.886 per gallon. Principal beneficiaries of the higher prices in California have been the refiners and marketers of gasoline, and the state from fuel tax collections. Retail dealer profits did not rise during 1999.

* REFINERS - California's market is more concentrated and vertically integrated than the gasoline industry in key refining areas east of the Rockies that supply most of the rest of the nation. Just six refiners control 92.2 percent of capacity in California, with two companies alone – Chevron and Tosco – accounting for nearly 50 percent of California's refining capacity.

* RETAILERS - The same six refiners in California own a majority of retail gasoline stations in the state, either operating the stations themselves or leasing them to dealers who must buy gasoline supplies directly from the refiners. In contrast, the top six refiners in Texas, a key refining center for the rest of the country, control less than 60 percent of capacity and account for less than 40 percent of gasoline sales through retail outlets.

* INDEPENDENTS - Relatively few independent gasoline marketers exist in California, reducing the potential for competition via imports from refining sources outside the state. In 1998, independent marketers accounted for less than 15 percent of all gasoline sold to consumers in California. In contrast, independent marketers accounted for more than 50 percent of gasoline sales in Texas. The only potential buyers currently of imported gasoline are California refiners, who have little incentive to bring in supplies from out of state when prices increase.

* GROWING MORE CONCENTRATED - California's gasoline market has become more concentrated over the past several years. Retail outlets have declined by 14 percent, four independent refiners closed gasoline-producing refineries, and three oil companies merged, entered joint ventures or acquired several hundred independent retail stations.

* INVENTORY PRACTICES - California refiners keep lower inventory levels than refiners elsewhere in the nation and have reduced inventories. Inventories in California and the West Coast were more than 20 percent lower in 1999 than in early 1990s. This amounts to four days worth of gasoline consumption. This means a relatively small supply disruption has the potential to lead to large price increases.

* PRICING PRACTICES - California refiners have increasingly used 'zone' pricing systems that allow the oil companies to monitor and selectively change pricing in certain areas without affecting pricing in other areas. With zone pricing, refiners can drop prices selectively to reduce the impact and curb the competitive threat from lower-priced independent marketers.

* CARB GASOLINE - By imposing requirements for cleaner-burning fuel, California uses gasoline that cannot be easily imported from other parts of the country. Many refiners outside the state either do not have the ability to produce CARB gas or do not choose to on a day-to-day basis, and California is some distance from major refining centers in other parts of the nation - Washington state and Texas.

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