Gas prices soar, we look at why
February 22, 2012 1:11 p.m.
Charles Langley, manager of UCAN gasoline project
Marie Montgomery, spokesperson AAA, Southern California
Related Story: Gas Prices Soar - San Diegans Feeling Pain At The Pump
CAVANAUGH: I'm Maureen Cavanaugh, it's Wednesday, February 22nd. Our top story on Midday Edition, prices at the pump rising at about $0.02 a day, motorists in San Diego paying over $4 a gallon in February? The relentless increase in gas prices taking place so early in the year has consumers and regulators trying to figure out what's going on. Charles Langley is manager of the gasoline project at the utility consumers' action network, or UCAN. Welcome to the show.
LANGLEY: Thank you.
CAVANAUGH: And Marie Montgomery is AAA spokesperson. Welcome.
MONTGOMERY: Thanks, Maureen.
CAVANAUGH: Marie, we've seen a recent jump in prices at the pump, $0.20 higher than a week ago. What is the average gas price we're seeing in San Diego now?
MONTGOMERY: Today it's at $4.11 a gallon. Hard to believe.
CAVANAUGH: Right. Now, how do we compare with the rest of the state?
MONTGOMERY: We're among the top three or four big areas in terms of the price. It looks like San Luis Obispo and Santa Barbara are higher, but San Francisco is actually lower.
CAVANAUGH: Is that usually not the case?
MONTGOMERY: That's usually not the case. San Francisco is usually -- if not the highest price, among the highest prices in the state.
CAVANAUGH: And Marie, I'm going to ask you to look out at the whole country now S. Where is California in the nation when it comes to high gas prices?
MONTGOMERY: Well, we're No. 2. We're usually No. 1. I mean -- excuse me, among the 48 states, the lower states, and that's still the case. But usually we're also behind Alaska and Hawaii. And after these latest price increases, we've overtaken Alaska as well.
CAVANAUGH: Now, Charles Langley, why are high gas prices unusual for February?
LANGLEY: Well, this is an early time of the year for the refineries to start on their spring turnarounds. Under federal and state law, they have to shut down, reconfiguring, and state manufacturing cleaner burning gas for the summer air quality. This last week, we saw two refineries conduct plan maintenance. And when they do this, there's less gas on the market, and the price goes up. It's pretty predictable.
CAVANAUGH: So what we're seeing now, do we know why they're doing this earlier than they usually do it?
LANGLEY: No. And to complicate the problem, a refinery basically blew up in Washington. And we get about 2% of our gasoline from that refinery in Washington.
CAVANAUGH: Now, it's a season of shortages. I've heard people talk about that. And of course people are very concerned about what's been happening in the Middle East. How does that, if it does, factor into what we're seeing here at the pump?
LANGLEY: What we're seeing is really a local phenomenon. This is very predictable. The refineries know it's coming every year. It actually works out to be a tremendous profit opportunity for them. This is a business that makes money when gasoline is in short supply. And this is a season when supplies tend to be less. And what's so very disturbing to us is that not only is this predictable but in the last few years, California has not only dialed back the production of gasoline on its refineries, producing less, we're exporting more and more. We're exporting 55,000 payroll barrels of gasoline a day to places like South America, Nevada, Arizona, and probably some might even be moving north now that there's been a refinery fire in Washington.
CAVANAUGH: So when you say California is doing that, you mean the oil refineries in California which are owned by the oil companies?
CAVANAUGH: I see.
CAVANAUGH: We saw peaks in the price of gasoline last year. But how does this year compare with that sort of ride-up of oil prices, and then they come down, and then the ride-up of oil prices, and then they come down? Is that what we've been seeing?
LANGLEY: Well, this is the highest price we've ever seen this early in the year. This is the highest price this early in the year ever in gasoline history. And what's troubling to us is even though we might not see a record-breaking price this year, although that's possible. What we saw last year was a year without record-breaking prices, but it was the highest price for gasoline on average. We'd see a peak, like a witch's hat, a spike in the chart typically. Last year, it just went up and stayed there. We didn't see that sharp little point like a shark's tooth on the fever chart. And I -- our concern is that that's probably what's going to happen again this year, especially if oil prices stay high.
CAVANAUGH: Because I think everybody remembers when gas prices -- really, I mean, they just went through the roof in the summer of 2008. Have we been up to those levels yet?
LANGLEY: No, we have to hit $4.64 a gallon before we break that record. And also, the market was being gamed by companies like Morgan Stanley and Goldman Sachs. What we saw was a bubble in the price of oil, it went up to $147 a barrel. And that hysteria helped drive gas prices. And one of the quirky things about the oil industry, when the price of oil goes up, and we're talking about oil in the Middle East that takes 90 days to get here, and it's being sold on the futures market, 30 days ahead of time, we pay for that future price increase sometimes in a matter of hours at the pump. And it's a completely specious relationship.
CAVANAUGH: But oil companies are allowed to do that because --
LANGLEY: Well, primarily because there isn't enough competition, especially at the refinery level. There are so few refiners in California, about seven, that they don't need to collude, there doesn't need to be a conspiracy. They can look at what the other guys are doing, and it's an industry where they really understand that when there's a shortage, they make more money. And the model for this industry is to make more money by selling less. And that's the model going forward in an era of peak oil.
CAVANAUGH: I want to open up the phones once again and invite our listeners to join the conversation if they'd like to make their predictions about what's going to be happening with the price of gas as this year continues or what they have been paying for it now. And Charles, I want to go back to what you were saying about the idea that the price of oil may just continue to increase and go up. How high can we expect gas prices to climb? Will we see $5 a gallon, do you think?
LANGLEY: You know, a lot of analysts are saying that. And I think that's based on the idea of a real crisis in the oil markets where Iran. And if we see a super spike in the price of oil where it goes up to 130 or $130 a barrel, then yes, $5 a gallon is entirely possible. I heard a report that Newt Gingrich was predicting $2 a gallon earlier today. If we just made the bucket bigger. If we opened up pipelines and solved some of our own infrastructure problems. That's really a naively optimistic assessment. The oil he's talking about getting at is obtained through hydro fracturing, and the extraction cost on that stuff is $75 a barrel. So just the oil right now in a gallon of gas costs about $2.20. So unless we do something to lower the price of oil, we're not going to lower the price of gasoline very effectively in the long run.
CAVANAUGH: I'm gonna ask you to put your hat on, your wizard's hat on for a moment and tell us, what do you think the price of gas to climb to, Marie?
MONTGOMERY: Oh, well, you know, we don't make predictions. But we can just sort of look at what's happened in the past and generally speaking, we reach a peak of spring prices in May. There is some sign that we could peak early this year. But it's very hard to say, and as Charles said, a lot has to do with what could be going on with Iran.
CAVANAUGH: Let me take a caller. Robert is on the line, calling from Point Loma. Welcome to the show.
NEW SPEAKER: I'm sure your guests are familiar with the concept of peak oil. There are a lot of us out here that educate ourselves about it, and we see the train wreck coming in the near future for mankind. And I just wonder if now is the time, concerned about gas prices, if now is the time that we start elevating this concept and train wreck that's coming into the national consciousness because our policy makers don't seem to be wanting to do anything about it, to head off the train wreck.
NEW SPEAKER: With this, it might be a good time to bring up the issue.
CAVANAUGH: Let me get a response to that. Charles, you're familiar with the concept of peak oil. Can you explain briefly what that is.
LANGLEY: Well, it was started by a guy named Hubbard who predicted that global oil production would peak some time between 2006 and 2012. And he was right. Where he was really right, it peaked in terms of the production of cheap oil, where we had a lifting cost from $3 to $12 a barrel, which is probably what Middle East crude costs to get out of the ground. The lifting cost for these new technologies, from the tar sands in Alberta and from shale deposits in north and South Dakota, it's probably on the order of $75 a barrel. So that's the cheapest our domestic oil can get. And this is a supply that could potentially last 50 or 200 years. There's plenty of it out there. But it is definitely the end of cheap oil, and there are huge environmental problems with pulling this stuff out of the ground.
CAVANAUGH: And isn't there also the concept of net return? When you actually are extending more energy to get energy out of a particular resource that you have to abandon that particular activity?
LANGLEY: Well, yeah. Some of what they're doing is unconscionable. They're literally burning off natural gas in huge geysers in it North Dakota to get at the oil down below. It's appalling.
CAVANAUGH: While we're dealing with these very, very high gas prices and the fact they may get higher, are there some things that we can do that we usually don't do to get the most mile annual out of our car?
MONTGOMERY: Sure, one of the things that we know that people don't do on a regular basis and could probably save them a lot in terms of what their gas usage is filling up your tires. That's a very simple thing to do. Try to check it at least once a month, if not every other fill-up, and -- because very every pound underinflated you are on each tire, you're using about 2% of your fuel economy. That is something that we definitely recommend. Even just driving the speed limit is going to save you a lot of money on gasoline, because you're going to maximize your fuel economy. Of course carpooling is great, and a lot. People, we see every year when the price goes up, we do see transit ridership go up. So people are definitely making those calculations in their own lives and trying to figure out how to best budget when the price does go up.
CAVANAUGH: If the trend continues as we expect it may, do you expect fewer people will be taking trips by car or the summer months?
MONTGOMERY: Well, we survey on a quarterly bases. And we've got a survey in the field right now. So we'll kind of be able to gauge a little bit better. But with gas prices over $4 a gallon in Southern California, certainly I would imagine there is more concern. So we'll just have to see how that impacts our travel this year. We haven't gotten the data back yet.
CAVANAUGH: Charles Langley, we are working as a country to get out of a period of economic hardship. What kind of effect do high gas prices have on our overall economy?
LANGLEY: It has a devastating effect. Because this is one area of unpredictability. In 2007, we have five of six airlines go into bankruptcy because of the cost of jet fuel. And the one company that survived was the one that hedged its costs. They had the better accountant, not necessarily the better airlines. But let's look at food. Food typically, if you're going to buy broccoli at the grocery store, not only is it shipped with diesel fuel or gasoline, it's fertilized with petroleum based fertilizer. The pesticides that are used are made out of petroleum. It's shipped to market and cultivated and picked with petroleum. So when it finally is on its way to the grocery store, it's probably chilled in a refrigerator with petroleum. So it affects everything. And one of the biggest inputs, one of the factors into the cost of food is petroleum. It affects our monthly budget, our household budget and the cost of energy, and what we pay in our utility bills. It has a ripple effect through the entire economy. So we really feel it with gasoline, but there's a far broader, more invisible effect. The cellphone in my pocket is made out of plastic, which is an oil-base the product. So it permeates everything. This is a hydrocarbon society. There's no getting around it.
CAVANAUGH: So it's not just with the price at the pump, when you finish filling up your tank. But it raises everything up a little bit and gets just a little bit harder to make any kind of budget.
LANGLEY: Yes. I think one of the single biggest determinants to the rate of inflation is actually the cost of oil.
CAVANAUGH: Is there anything that we can do? What is the utility action -- consumer action network doing? Protesting in any way?
LANGLEY: In a lot of ways, at the California level, there's a regulatory issue in that what we need to break up the refineries and make them start competing. Right now, they're inclined to tacitly cooperate. And these price spikes are very profitable for them. When we look at their cracked spreads in a couple months, which is how much money they're making after they pay for their oil, I guarantee you they will be very high. There will be an increase in profits for all of them. On a national level, we really need a new energy policy. What we need to do personally though is be aware that oil prices and gas prices are going to get higher and higher. There may be a lot of oil available, but this is the end of cheap oil. And we need to protect ourselves, and it's not a good time to be planning to buy a hummer and planning on gas prices decreasing. It's just not going to happen.
CAVANAUGH: We are out of time. Thank you both very much.
MONTGOMERY: Thank you.
LANGLEY: Thank you.