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Market Realities: Lessons from California


By Hank Hogan

California gasoline is unique. The California Air Resources Board (CARB) has required the sale of reformulated gasoline since 1992. California Reformulated Gasoline (CaRFG) regulations are for the most part more restrictive than U.S. federal regulations. The state’s specification is contained in Title 13, California Code of Regulations, Sections 2250-2273.5, which was last amended on October 9, 2012.

California Phase 3 Reformulated Gasoline (CaRFG3) has lower levels of benzene, aromatics, olefins, sulphur and lower vapor pressure than gasoline sold anywhere else in the United States. CaRFG3 has flat, or maximum, limits as well as average limits, which are applied to the finished product sold to end-users. For benzene, the maximum percent by volume (%-vol) is 0.80 and the average limit is 0.70 %-vol. For sulphur, the flat limit is 20 parts per million (ppm) and the average limit is 15 ppm.

The limits set by the U.S. Environmental Protection Agency (EPA) also apply to the finished fuel. They are less stringent, although in varying degrees and ways. For instance, for benzene, the allowable average of maximums cannot exceed 1.3 %-vol while the overall annual average must be less than 0.62 %-vol. For sulphur, up until the end of 2016 the limits were 30 ppm average with a max of 80 ppm for any one gallon of gasoline. New rules being phased in beginning January 2017 will cut the annual average to 10 ppm, while the individual gallon limit still 80 ppm. There are exemptions for small refineries.

“Further, California has a lower vapor pressure (7.0 psi maximum) for a longer time period than the 7.8 and 9.0 psi maximum of EPA,” said Lewis Gibbs, who is a retired Chevron fuel expert who is actively involved with ASTM International, one of the world’s largest standards developers.

So, California gasoline must meet more restrictive maximums, averages, test conditions, or some combination of these, with the exact difference between the state’s requirements and those elsewhere depending upon the specific parameter. The result is that when it comes to emissions-related fuel specifications, California has more stringent standards, as acknowledged by the EPA when it rolled out the current benzene standards in 2012 and exempted the state from meeting them because the state limits were deemed by the agency to be more restrictive.

California state tax on gasoline is USD0.3819 per gallon, the sixth highest in the country. When combined with the federal tax of USD0.184, California gasoline starts at USD0.56 per gallon. Given that and the tighter specifications that make the fuel more expensive to produce, it’s no surprise that California gasoline is sold at a premium, the second highest nationally in an October 2016 survey.

And when you have supply disruptions, such as the February 2015 explosion at the former ExxonMobil refinery in Torrance, Calif., there are price spikes. After the Torrance accident, for instance, the retail cost of gasoline jumped by a dollar in the Los Angeles area.

The Torrance refinery represents 8% of California’s refining capacity of 1.9 million barrels per day. ExxonMobil sold the refinery to PBF Energy in September 2015.

“What makes California’s gasoline price challenging is two things. It’s an environmental specification that is much tighter than anywhere else in the world. And it’s a market that is largely isolated from most of the world,” said Skip York, vice president at consulting firm Wood Mackenzie.

California refineries send products to terminals within the state through pipelines, but pipelines going into the earthquake-prone state are limited due to geographic factors. There’s also not much incentive for brokers to bring in products from outside of the state because of the state’s high fuel tax and transportation cost, said Patrick Murphy, director of business development at Amalie EcoProcess & Energy Group, LLC in Tampa, Fla.

California’s isolation is also a consequence of the state’s stringent environmental impact requirements and the resulting strict gasoline specifications. Thus, any fuel imported in response to a shortfall can only be produced at a limited number of refineries outside of California, York said.

Analysing the price spike following the Torrance explosion, York attributed two-thirds of the increase to higher crude oil prices and higher refinery operating costs arising from higher natural gas prices. Only a third was due to the supply disruption, he said.

However, the Natural Resources Defense Council (NRDC), an environmental advocacy group, claims that fuel suppliers received USD6.2 billion in windfall profits over a 16-month period following the Torrance refinery outage. The California Attorney General is reportedly investigating whether there was price fixing or collusion among fuel suppliers, but Brenda Gonzales, a spokesperson for the state’s Attorney General said, “We can’t confirm or deny a potential or ongoing investigation to protect the integrity of any investigation.”

The state government is also looking at ways to mitigate future shortages. One option being considered is a waiver to allow the importation of non-compliant fuel into the state upon payment of a surcharge fee. Another is to require fuel reserves. A third is for the state to purchase fuel on forward contracts.

Each of the options brings their own set of unique challenges. Allowing non-compliant fuel in the state would not change the lead time required to transport fuel and could result in higher emissions. A fuel reserve brings up a multitude of questions such as who would pay for it. Forward contracts could require public funding.

All of these concepts focus on addressing supply-side issues, said Simon Mui, NRDC’s senior scientist and director of California vehicles and fuels. On the demand-side, Mui suggests reducing demand for conventional fuels by requiring more fuel-efficient vehicles, the use of alternative fuels and smart growth.

“I think those solutions will have a far bigger impact than any of these measures [under discussion]. We need to be looking at all options,” he added.

Market Realities: Lessons from California


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