A Primer On Gasoline Prices

The State of California operates its own
reformulated gasoline program with more stringent requirements than
Federally-mandated clean gasolines. In addition to the higher cost of
cleaner fuel, there is a combined State and local sales and use tax of
7.25 percent on top of an 18.4 cent-per-gallon Federal excise tax and
an 18.0 cent-per-gallon State excise tax. Refinery margins have also
been higher due in large part to price volatility in the region.

California
prices are more variable than others because there are relatively few
supply sources of its unique blend of gasoline outside the State.
California refineries need to be running near their fullest
capabilities in order to meet the State’s fuel demands. If more than
one of its refineries experiences operating difficulties at the same
time, California’s gasoline supply may become very tight and the prices
soar. Supplies could be obtained from some Gulf Coast and foreign
refineries; however, California’s substantial distance from those
refineries is such that any unusual increase in demand or reduction in
supply results in a large price response in the market before relief
supplies can be delivered. The farther away the necessary relief
supplies are, the higher and longer the price spike will be.


California was one of the first States to ban the gasoline additive
methyl tertiary butyl ether (MTBE) after it was detected in ground
water. Ethanol, a non-petroleum product usually made from corn, is
being used in place of MTBE. Gasoline without MTBE is more expensive to
produce and requires refineries to change the way they produce and
distribute gasoline. Some supply dislocations and price surges occurred
in the summer of 2003 as the State moved away from MTBE. Similar
problems have also occurred in past fuel transitions.