61.6 F
Los Angeles
Monday, Sep 25, 2023

Refinery Blast Costs Californians $3 Billion … So Far

ExxonMobil’s Torrance refinery typically supplies as much as one-fifth of Southern California’s gasoline, so it’s no surprise that an explosion that ripped through the facility in February caused prices to jump at the pump.

But few could have guessed that, seven months later, the refinery would still be largely idle because regulators have balked at allowing the refinery to ramp up operations. As a result, the cost to drivers has run into the billions of dollars.

By the end of this month, the refinery explosion and a handful of lesser supply disruptions will have cost Californians nearly $3 billion more at the gas pump, according to a Business Journal estimate. That’s more than $75 for every man, woman and child in the Golden State.

To put a figure on the cost of the ExxonMobil refinery closure, the Business Journal basically subtracted the amount that motorists normally would have paid for gasoline this year from the amount actually paid. The differential was more than $2.9 billion.

The Business Journal arrived at that figure by looking at data on gasoline prices from the Energy Department, comparing California’s prices with the national average for the first nine months of this year and then doing the same calculation for the same months last year. The differential was much greater this year.

The Business Journal then multiplied this year’s differential each month by the number of gallons purchased, using fuel sales data from the state Board of Equalization.

The agency reports the number of gallons of gasoline purchased in the state each month, but its most recent report is for May. The Business Journal estimated fuel sales for June through September by adjusting last year’s figures based on the growth in fuel consumption for the first five months of the year.

A separate analysis this month from Santa Monica advocacy group Consumer Watchdog put the total price of the pump differential at about $5.3 billion. But that analysis did not subtract out the historical normal differential or the cap-and-trade impact.

Separately, William Yu, economist with the UCLA Anderson Forecast, looked at the higher price differential between Los Angeles and the national average and calculated that it cost the L.A. region about $3 billion, or the equivalent of a half-percentage point of growth.

“If things had been closer to historical norms, gas prices in L.A. should have been closer to $3 a gallon this summer instead of closer to $4 a gallon,” Yu said. “The consumer should have had more money to spend elsewhere if local gas prices had remained at a constant level above the national rate.”

Staff Reporter James Rufus Koren
contributed to this story.

While the falling price of crude oil this year has resulted in big savings nationally, savings in California have been much smaller as the state – and particularly Southern California – has become more reliant on expensive imported fuel. That means the difference between gas prices here and in the rest of the country has widened sharply. Last Thursday, for example, AAA reported that the average price for regular gasoline was $3.23 a gallon in California – 86 cents more than the national average. Normally, Californians pay only about 40 cents more.

That wider-than-normal spread adds up to billions extra spent at the pump that could have been invested elsewhere in the economy.

One local economist estimates that Los Angeles County’s growth rate is a half-percentage point lower than it should have been – that’s roughly 20,000 foregone jobs that otherwise would have been created.

The frustration among local businesses at the stubbornly high gas prices is palpable.

“It is certainly frustrating to know that while oil prices have come down globally, the L.A. region isn’t feeling the benefits of this global reduction in fuel prices,” said Robert Krieger, president of Norman Krieger Inc., a Carson freight forwarder that both uses its own trucks for transport and procures third-party trucking services for its clients. “This situation just adds to the conclusions of a lot of importers and exporters that L.A. is not a good place to do business.”

Price premium

Over the past several years, Californians have paid about 40 cents more than the national average for a gallon of regular gas, according to figures from the federal Energy Department. The added cost comes from state requirements for cleaner, more expensive fuel blends and higher sales taxes on fuel purchases. But since March, the first full month after the refinery explosion, Californians have been paying a premium more than twice as large – about 88 cents a gallon.

Not all of that increase is due to the ExxonMobil refinery. The state’s cap-and-trade system which requires refiners to purchase permits for the carbon pollution they emit, is estimated to add as much as 12 cents to the price of a gallon of gas. But even backing out that 12 cent bump, Californians are still paying much more than usual for gasoline – an average of 32 cents extra for every gallon since March, with the lion’s share of that increase tied to the refinery blast.

Last month, the Business Journal estimates Californians paid as much as 36 cents a gallon more than they would have had the ExxonMobil refinery been running as normal. Take that 36 cents times the 1.3 billion gallons of gas purchased in California last month, and it amounts to about $475 million in added cost – just in August.

Another example: The extra amount California have paid so far this year – just the extra amount for gasoline – could have bought all the homes sold in Los Angeles County in July, assuming all 5,278 homes sold at the month’s median price of $525,000. There would have been enough left over to buy L.A.’s largest mansion, the former Spelling Manor in Holmby Hills.

In all, the Business Journal estimates that through the first nine months of this year, the extra amount paid for gasoline in California will hit $2.9 billion, with most of that resulting from the downed ExxonMobil refinery.

Mounting delays

The higher than normal price spread is likely to continue for at least a couple of more months, if not longer. That’s because plans to step up production at the ExxonMobil refinery have been repeatedly delayed, primarily because of a dispute between company executives and local air quality regulators over a plan to reactivate old pollution control equipment while newer equipment, which was damaged in the explosion, is being fixed.

The older equipment emits more pollutants and that has generated opposition to the restart plan from local residents and environmental groups.

A twice-delayed hearing before the South Coast Air Quality Management District over the plan to restart main refinery operations is now set for this week. If ExxonMobil is allowed to move forward, it will only be able to operate the refinery at two-thirds capacity – to cut down on emissions – and it will be required to spend millions of dollars to implement additional pollution control measures.

Even if this plan is approved, it will still be several weeks before the plant can ramp up operations. Its currently running at under 20 percent capacity.

ExxonMobil first approached the AQMD in April with its restart plan. The key holdup has been over the district’s insistence that when the main refinery restarts, it emits the same level of pollution as before, despite the older pollution control equipment.

“There must be no net increase in emissions and that must be verifiable,” district spokesman Sam Atwood told the Business Journal last week.

Atwood said district staff have been negotiating with ExxonMobil over how to meet that target. As of last week, just a few remaining details needed to be worked out, but those were enough to push the hearing back 10 days.

Jumping gun

It wasn’t supposed to be this way. Back in spring, the expectation in the industry was that a restart plan would be in place by summer, in time for much of the peak summer driving season.

As a result, refined-gas market traders made a major miscalculation that caused a huge spike in prices in July, according to David Hackett, president of Stillwater Associates, an Irvine consultancy to the refining industry. In late May and early June, they cut back on orders for imported gasoline, figuring the extra imports wouldn’t be needed when the ExxonMobil plant came back on line.

But when July came and the plant was still mostly idle, refineries and other refined-gas procurers had to scramble to secure enough imports to meet summer demand. In the meantime, prices shot up 60 cents a gallon in two weeks, further exacerbating the price spread between the Southern California market and the rest of the nation.

The national average in July was $2.79 for a gallon of regular; in California, it was $3.76. In the county, average prices briefly topped $4 a gallon.

Once more imports arrived in late July, prices eased back down a bit, but the price differential between California and the rest of the country was still more than 85 cents – and more than $1 in Los Angeles, which has been hit harder than Northern California by the refinery explosion.

Howard Fine
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

Featured Articles

Related Articles