Paying the Price: Why Are S.F. Gas Prices So High?

Bay Area motorists pay the highest gas prices in the state

When gas prices spiked above the $2-per-gallon mark in the Midwest this spring and caused a national outcry, Bay Area motorists could only laugh. After all, they've been used to paying the magic figure since early 1999, and San Francisco's prices consistently have been the highest in the state for several years.

Gas pricing is a complex science even in the simplest of times, and lately, oil companies say, conditions have been anything but simple. OPEC production cuts have sent crude prices through the roof. Explosions and other disruptions at California refineries caused price surges in 1999 and 2000. Californians pay more fuel taxes than citizens in 40 states, and the cost of meeting the state's stringent environmental regulations adds still more to the pump price.

As for the marked difference in gas prices between cities, blame the high cost of doing business in San Francisco for its top-dog status, as Chevron notes on its Web site. New stations in the city cost 50 percent more to build than those in L.A., which has seen 65 added to its metro landscape in the past four years. Increased competition down south, Chevron says, means lower prices.

As a fact sheet from the Western States Petroleum Association says in summary, "It's the market, and nothing but the market, that determines gas prices."

But an advanced degree in economics isn't required to detect serious flaws in those arguments. The state does have relatively high gas taxes, and industry analysts estimate the added cost of reformulated gas at about six cents a gallon. But nine states have higher taxes, and still other states or regions now require cleaner-burning fuel, yet their prices haven't kept pace with those in California. And almost none of the gas consumed in the state comes from OPEC; rather, it's produced offshore and in Alaska for a few bucks a barrel. But the savings aren't passed along to the consumers, who pay as though the gas originated in Kuwait.

Explaining San Francisco's elevated prices relative to the rest of California presents even more of a challenge for the corporate tightrope walkers. Chevron's claims about the high cost of constructing stations in San Francisco are a bit disingenuous, since no new stations have been built there for 15 years. In areas of high population growth around the bay, stations are sprouting alongside subdivisions and strip malls. And Chevron leaves out an important part of the equation: Since 1994, according to an industry-funded study, more stations in L.A. have closed than opened. This relative decrease in competition is compounded by the finding that more people are using the existing stations in San Francisco than before, allowing the dealers to work on smaller margins.

The cost of labor, real estate, and other factors often have been cited to justify a gap in price between San Francisco and other California cities. That argument is hard to refute, because the numbers are proprietary. But Shell documents in a Hawaii lawsuit indicate that the claims at best stretch the truth. According to the documents, Shell's fixed costs for November 1996 totaled 7.4 cents per gallon in San Diego, 7 cents in L.A., and 7.1 cents in San Francisco.

Even assuming that conditions in San Francisco warrant a few cents a gallon more at the pump, the majority of the difference in cost is coming at the wholesale level, from the refinery. The Bay Area has several refineries that supply the city; so it is strange, then, that the gas is piped to Stockton and sold for 20 cents less per gallon. "The lowest cost of doing business for the oil companies is where the refineries are," says dealer consultant Tim Hamilton, "but in San Francisco [the retailers] pay the highest price."

The answer to California's prices may not ultimately lie in the convoluted explanations of the industry apologists. Perhaps more to the point is the comment a Purdue economist made during 1998 hearings on San Diego's inflated gas prices, according to news accounts. To suggest that gas prices are based on the cost of the product is foolish, said the economist, who spoke at the behest of the Western States Petroleum Association. Rather, he said, they are solely driven by what the market will bear.

 
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