California Gas Prices: the Answer Always is More Regulation

The Phillips 66 refinery in Rodeo (Merc)

We've posted before about why California gasoline prices are higher than the rest of the country (gas taxes, "boutique" gas formula, banning new Internal Combustion Engine cars after 2035, etc.).

As refineries close down, the ones that remain have been accused of price gouging--any person capable of critical thought might ask herself why refiners are abandoning such a profitable business--but critical thinking about Progressive governance has been sorely lacking for decades.

The long-term supply outlook has become so dire that last week the Progressive government floated trial balloons about California seizing control of the refineries. Realizing that running refineries (and bearing responsibility for the inevitable debacles) was a step too far, Governor Newsom proposed a bill that he thinks will stabilize fuel prices. [bold added]

California Gov. Gavin Newsom on Thursday announced a first-in-the-nation plan to require petroleum refiners to maintain minimum fuel reserves to avoid supply shortages he says create higher prices at the gas pump.

The proposal would authorize the California Energy Commission to require state refiners to maintain a minimum supply, which would help prevent gas price spikes and save Californians hundreds of millions of dollars every year. Newsom said profit spikes for oil companies are overwhelmingly caused by refiners not backfilling supplies when they go down for maintenance.

The industry is likely to have to build storage facilities in order to hold the gasoline reserves. Also, the gasoline reserves themselves have a cost. As students learn in Finance 101, all assets on the balance sheet are financed through debt or equity (for analytical purposes debt is assumed). Adding storage and gas-reserve assets will increase interest expense which the companies will try to recover through higher prices.

Higher prices are what Governor Newsom was trying to avoid, but if the regulator doesn't allow the expense to be passed through to the customer, the exodus of refiners will accelerate. In the one-Party state, the answer to unforeseen consequences of regulation is always more regulation that will make the problems worse.

Chevron's Departure: the Self-Ruination of California

Closing Chevron's Richmond refinery will have substantial
negative impact on California's gasoline supply chain.

Last week's announcement by Chevron that it is moving its headquarters from San Ramon (35 miles east of the Peninsula) to Texas comes as no surprise.

IMHO, old-timers in ownership and management had Chevron hanging on in California because of sentimentality over its 145-year history in the State; however, repeated public excoriation of the oil and gas industry and laws that made it increasingly costly to operate took its toll.

When California announced that it wanted Chevron to close down operations 10-25 years in the future--but not yet--there was no reason for it to adhere to California's timetable. [bold added]

Chevron, which dates its origins to the California Star Oil Works, which struck oil in the Santa Susana Mountains of Southern California in 1876, characterized the move from San Ramon to Houston as merely an ordinary managerial consolidation.

However, given its prominence, Newsom’s recurrent vilification of the industry and his vow to end sales of gasoline-powered cars as a way of becoming carbon-neutral by 2045, the move’s political aspects could not be ignored.

Initially, Newsom posted on social media a video denouncing oil industry “price gouging,” including a melty-face emoji characterizing the industry’s reaction to California’s efforts to dampen gas prices.

But his office quickly took down the video and issued a statement saying Chevron’s announcement “is the logical culmination of a long process that has repeatedly been foreshadowed by Chevron.”

...California has seen a steady exodus of corporations, as the Bay Area Council noted, thus reinforcing its image of hostility to business.

Just days earlier, Elon Musk, who had already moved his Tesla corporate headquarters to Texas, announced that X and SpaceX would follow.

Chevron’s announcement also comes amid a flurry of layoffs and corporate retrenchments in the Bay Area’s high-tech industry, which have contributed to the state’s having the nation’s highest unemployment rate.

Moreover, we may not have heard the last of Chevron’s moves. The company had been warning California officials that it might close its two refineries in the state, which are major producers of the state’s unique gasoline blend.

Voters in Richmond, the site of one Chevron refinery, will decide in November whether to impose a special tax on the refinery, $1 per barrel, and the company has accused Richmond’s leaders of “playing chicken” with their largest taxpayer and employer.

Progressive politicians who accuse refineries of price gouging should ask themselves why those greedy capitalists are shutting down the refineries and foregoing such a profitable business. Such self-reflection is foreign to the one-party state. In fact, one risible solution promises to dig the hole deeper.

Enter Mr. Newsom’s energy commission, which is charged with investigating the causes of California’s high gas prices. A commission staff report this week failed to find wrongdoing but nonetheless floats state control of the refining industry.

One idea is to “purchase and own refineries in the State to manage the supply and price of gasoline.” At least the commission concedes there are “significant legal issues” to address and “there are complex industrial processes that the State has no experience in managing.” That’s for sure.

Sacramento can’t currently provide basic public services such as reliable power. How would it run an industry it wants to shut down? The report wonders too: “As demand for fossil fuel declines, will the presence of State-owned refineries inhibit an orderly phase out of refinery capacity?”

If Democrats in Sacramento want to reduce refinery production, nationalizing the industry a la Venezuela would work. But as the report muses: “What would drive how the State managed the refinery? Profit? Maximize production? Minimize production?” This is hilarious.

Sure, manage an oil refinery when the government cannot even manage the services such as education, public transportation, and police protection that it is supposed to provide. If we weren't laughing, we'd be crying.

California: Blaming Everyone but Itself

Once again California's high gas prices have made the headlines: [bold added]

'Gas prices are spiking again in the Bay Area — as much as 20 to 30 cents a gallon higher than the California average and at least $2 a gallon more than the rest of the country, according to the latest data from the American Automobile Association (AAA).

The national average on Friday was $3.67 a gallon, compared to the Golden State’s $5.45, the highest in the U.S., according to AAA.

Bay Area drivers who are sometimes stuck paying close to $6 a gallon said they are suffering and finding alternate ways to get around.

AAA's Andrew Gross provides part of the explanation for the Bay Area's "premium" over the national average:

Gross said spring is also the time where gasoline is switched from winter blend to summer blend, which is more expensive to refine but helps keep air quality cleaner.

“And then you have to take into account location. The West Coast is what many consider an oil island in that it is far from the main oil production centers of Texas, Oklahoma and the Gulf Coast and those mega refineries down there as well,” Gross said. “And west of the Rockies it’s more challenging to build pipelines, so you tend to move product by rail and truck more than say east of the Rockies. So you also have higher distribution cost that factor in as well.”

Oil Price Information Service's Tom Klosa points to refinery closures:

In 2020, Marathon closed its refinery in the Bay Area, and over the last year Phillips 66 stopped processing crude oil at Arroyo Grande in San Luis Obispo and Rodeo in Contra Costa County, Klosa said.

“Both companies idled their refineries and are concentrating on supplying renewable fuels such as renewable diesel and sustainable aviation fuel. Neither is making gasoline, and that leaves the area without a safety net. Should one of the remaining refineries (Chevron Richmond, Valero Benicia or PBF Martinez) have issues, supply can become very challenging,” Klosa said.

The American Energy Alliance adds two more factors, taxes and regulation:

California has the highest gas tax in the country at 68 cents per gallon, compared to 39 cents for the national average, according to the American Energy Alliance.

The state also has a cap-and-trade program and low-carbon fuel standard that adds roughly another 46 cents a gallon, according to the group.

As surely as night follows day, California blames high prices on greed and price-gouging:

Newsom in November accused “Big Oil” of raking in “huge profits” last summer while gas prices spiked and said that “we’re continuing to hold them accountable with the new tools from our gas price gouging law.” But it remains to be seen how the new Division of Petroleum Market Oversight will affect gas prices.

California's blaming the industry is reminiscent of its railing against insurance companies until enough of them stopped writing policies. It's mystifying to these non-businessmen that oil refiners and insurance companies are leaving the State instead of getting in on that price-gouging action. Over a year ago we wrote:

It's also clear that a persistent price premium must have an explanation other than capitalist greed, which, if that were the case, would exist peculiarly only in California. My hypothesis: gasoline producers have only 12 years to recover their investment [because of the ban on new gas-powered vehicles starting in 2035] in California plant and equipment, after which the market for gasoline will dry up. In the rest of the country refiners can count on a useful life of 20 years or longer, thereby lowering the prices they require to turn a profit

Not all California's politicians are that stupid, of course. They know full well that the high gas prices that their policies have caused are forcing drivers to consider buying EV's, but they're deflecting blame on to the fossil fuel industry, the left's whipping boy for the past 50 years. Very few in the media or academia are calling them out, so they continue to get away with their disingenuous explanations.

An EV Will Have to Wait

Filling a tank is easy, charging a Tesla needs parking instructions.

Buying an electric car has been the medium-term plan, but lately I've been having second thoughts that have nothing to do with range anxiety.

Operating an electric car means learning a new way of performing basic functions, like opening the door, turning on the "engine," and braking. [bold added]

On the Ford Mustang, you press a circular button on the door and it pops open.

On the Kia EV6 and Hyundai Ioniq 5, the handle is flush with the car and pops out when the car is unlocked. With the Tesla Model Y, you need to push in the wide part of the handle then pull the longer skinnier part toward you. Thankfully, there’s a GIF for that...

Instead of a physical key fob, Tesla provides a hotel-style keycard. You can also use Tesla’s smartphone app as a key. As soon as you open the Model Y’s door, the touch screen powers on and you can operate all controls...Ford, Hyundai and Kia stick to start/stop push buttons. There are key fobs, but you can also set up the apps as keys...

OK, you know how traditional automatic-transmission cars creep forward when you take your foot off the brake? That generally isn’t the case with EVs. To move, you tap the accelerator. (Even in reverse, which can be a little unnerving.) As soon as you take your foot off the accelerator, the car slows and brakes on its own. You only hit the brake pedal itself if the car isn’t slowing quickly enough. Most EVs let you do “one-pedal driving”—that is, driving with only the accelerator.

In our three-car non-EV family it's already crucial to be aware of which car I'm driving. The oldest, a 2004 Camry, doesn't have infrared sensors that trigger beeps when the car gets too close to a stationary object or pulsing sounds when a vehicle or pedestrian approaches. I've caught myself counting on a warning light in the side view mirror, then remembering to turn my head to check the blind spot in the old car.

If I got used to driving an EV, I'd have to remember that our ICE (internal combustion engine) cars won't automatically brake when I take my foot off the gas pedal. The variation would be extensive if we got an EV, so for safety's sake, we'll wait until more user-friendly and standardized controls are developed.

[Side note: why don't we at least get rid of the pre-sensor pre-GPS 2004 Camry? We need an old car to drive into and park in San Francisco, where windows are smashed and catalytic converters are cut off with impunity.]

Absolute Power Corrupts Absolutely

2020: in front of four EV's Gavin Newsom bans the sale of gas-powered cars by 2035.

Gavin Newsom's war against fossil fuels has been waged across several fronts, including

Banning the sale of new gasoline-powered vehicles starting in 2035;

Imposing "price gouging" penalties on the oil and gas industry;

Prohibiting improvements to and retrofitting of pre-existing wells around which communities have sprung.

Yesterday the Governor withdrew the price-gouging legislation in favor of setting up an Executive Branch "watchdog": [bold added]

On Wednesday, the governor’s office said it is proposing legislation to create a watchdog body, backed by subpoena powers, within the California Energy Commission to investigate the state’s oil refinery market and gas prices. Based on findings from the watchdog entity, the commission could issue penalties at its discretion on the state’s oil refiners, according to advisers in the governor’s office.

IMHO, the new proposal is worse than the one it replaced. "Penalties at its discretion" is an invitation to corruption, i.e., payments to the right people will get fines waived since there don't seem to be objective criteria about where the penalty lines are.

It's also clear that a persistent price premium must have an explanation other than capitalist greed, which, if that were the case, would exist peculiarly only in California. My hypothesis: gasoline producers have only 12 years to recover their investment in California plant and equipment, after which the market for gasoline will dry up. In the rest of the country refiners can count on a useful life of 20 years or longer, thereby lowering the prices they require to turn a profit.

Come summer hellfires or winter high waters, the Progressives in charge of the one-party State are marching California to their utopian destination, while making sure that they're getting their cut along the way.

California Premium

California's "price gap" between its gasoline and the rest of the country's is nearing $2 per gallon, the largest in 22 years: [bold added]

Much of California’s high gasoline costs are explainable. The state’s 54-cent gasoline excise tax is among the highest in the country — only Pennsylvania’s is higher. There are also stricter environmental regulations and special fuel blends that prevent rampant smog from accumulating in cities, altogether these factors tack on roughly $1.20 to California’s gas prices.

But the widening gap between what everyone from San Jose to Los Angeles is paying compared to the rest of the country is due to the concentrated nature of California’s oil refineries, experts say. Due to the state’s special gas blend, California is often termed a “fuel island” because nearly all gas sold in the state is refined locally by a handful of companies, including Chevron, Marathon Petroleum and PBF Energy. That means mechanical hiccups at refineries can cause major price spikes not seen elsewhere in the country.

California progressives have imposed a boutique gas formulation and higher gas taxes because they can do so without opposition. These factors have been known for years; for example, in 2019 we posted on this subject when the price gap was a mere $1.40 per gallon.

Undoubtedly the politicians will blame the oil refiners for greedy behavior that is mysteriously absent in the other 49 states. Having neither self-awareness or business experience, the politicians cannot imagine why capitalists don't invest a dime in an industry that they not only have trashed publicly but will regulate out of existence beginning in 2035.

Well, Californians have voted for these policies consistently since the turn of the century, and if they are looking for someone to blame they should just look in the mirror.

It's Very Clear

Consumer sentiment, which tracks inflation, and consumer
confidence, a jobs-based indicator, both fell in 2022 (WSJ)

Following up on yesterday's post on the prices I've been seeing at the store and at the pump, this morning's inflation report confirms that inflation is "easing":

U.S. Inflation Eased Slightly to 8.5% in July

U.S. inflation eased slightly but remained close to a four-decade high in July despite cooling energy prices.

The Labor Department on Wednesday reported that the consumer-price index rose 8.5% in July from the same month a year ago, down from 9.1% in June. June marked the fastest pace of inflation since November 1981. The CPI measures what consumers pay for goods and services.

Core CPI, which excludes often volatile energy and food prices, held steady in July, increasing 5.9% from the same month a year ago, a sign that broad price pressures remain in the economy.

Because these reports are based on recent historical data, they don't necessarily capture what is going to happen.

There are moderating trends in real estate. In June we pointed out the dramatic negative effect that interest rate hikes can have on housing prices. In the Bay Area we have seen seller markdowns, fewer bids on listings, and houses being pulled from the market.

We're hopeful, but don't break out the bubbly. Barring a severe recession, the overall price level will not be dropping. In fact, Fed Chairman Powell's goal is to get inflation down to "the Fed’s 2% target within a couple of years." With apologies to the Gershwins, it's very clear high prices are here to stay.

Prices Dropping to a Higher Plateau

A regular shopper at Costco, I was taken aback by the sight of Charmin toilet paper on sale.

Palettes and shelves of toilet paper had fluctuated between empty and threadbare since the beginning of the pandemic, and the markdown gave hope that the balance between production, inventory, and demand had somewhat normalized.

However, the sale price of $19.49 was about 10% higher than the comparable sale price at the end of 2019.

The price level of toilet paper, in fact everything, appears to have reached a higher, permanent plateau.

We were pleased to see that gas had dipped below $6 a gallon at the end of June. During our round trip to Seattle at the end of July the cost in California was $5.20, while in Washington it ranged between $4.50 and $4.80. In the Bay Area this week we paid $4.95 (picture).

I like the downward trend, but I doubt we'll ever see the $3.20/gallon we paid at the end of 2019 in a "normal" economy or the $2.80 at the end of 2020 when activity had slowed to a crawl. Like I said, a higher, permanent plateau.

Will the Dip Stick?

For the first time in a month, I paid less than $6 a gallon for gasoline.

This could be one of those good news/bad news moments, the good being that gasoline prices have peaked, and the bad being that a recession is becoming more probable.

Headline: Consumer Sentiment at Record Low Is Another Ominous Sign for Economy

The University of Michigan’s gauge of consumer sentiment reached a final reading of 50 in June. That was the lowest reading on record going back to 1952, and down from both an initial reading earlier in the month and May’s 58.4 reading.

A souring mood for consumers, who face the highest rate of inflation in four decades, is a concerning sign because household spending accounts for about 70% of U.S. economic output. Retail sales fell in May, the first decline this year, and job and wage growth slowed last month. Economists surveyed by The Wall Street Journal have raised the probability of recession.

When consumers think that a recession is on the horizon, many will cut back their spending to build a financial cushion, all but ensuring a recession will occur. We may even see sub-$5 gas, but it won't be because more supplies are coming online but because the economy is slowing.

They Learned Nothing from the Experience

Now that's a hockey-stick (WSJ graph)

The 1970's-type inflation that we've been predicting for over a year is here with a vengeance.

U.S. Inflation Hit 8.6% in May: Energy, groceries, shelter costs drive fastest rise in consumer-price index since December 1981

U.S. consumer inflation reached an 8.6% annual rate in May, its highest level in more than four decades as surging energy and food prices pushed prices higher...

May’s increase was driven in part by sharp rises in the prices for energy, which rose 34.6% from a year earlier, and groceries, which jumped 11.9% on the year, the biggest increase since 1979. But inflation pressures were distinctly broad-based in May, said Sarah House, senior economist at Wells Fargo Securities.

“Inflationary pressures were seen nearly everywhere,” she said.

Prices for used cars and trucks—a key engine of the past year’s inflation surge—rose 1.8% in May from April, reversing three months of declines. Shelter costs, an indicator of broad inflation pressures, accelerated on a monthly basis in May and were up 5.5% compared with a year ago.

Airline fares rose 12.6% on the month, the third straight double-digit rise.

The younger folk who have never lived through high inflation may be forgiven for not seeing the warning signs, but the gerontocrats who run the country have no excuses.

But wait--it could get worse. We are already seeing early signs of a recession with layoffs in tech and a cooling housing market (mortgage interest rates have risen above 5%). The dreaded stagnation + inflation = stagflation is possibly looming. It will require skilled economic leadership to engineer a "soft landing," i.e., reduce inflation without cratering the economy.

Based on their performance so far, how would you bet, dear reader?

Inflation: I Hope They Know What They're Doing

March, 2021: Brisket $3.69/lb

The headline story in Friday's WSJ comes as no surprise. On our weekly shopping trips we've been noticing substantial increases in the price of food, and it's a good thing that we don't drive much any more because Bay Area gas is almost $4 per gallon. As noted in an earlier post, we've been having flashbacks to the 1970's. [bold added]

The Labor Department said last month’s increase in the consumer-price index was the largest since August 2008, when the reading rose 5.4%. The core-price index, which excludes the often-volatile categories of food and energy, jumped 3.8% in May from the year before—the largest increase for that reading since June 1992.

May, 2021: Brisket $4.49/lb

Consumers are seeing higher prices for many of their purchases, particularly big-ticket items such as vehicles. Prices for used cars and trucks leapt 7.3% from the previous month, driving one-third of the rise in the overall index. The indexes for furniture, airline fares and apparel also rose sharply in May.

To be sure, a portion of these price hikes represents a springing back of demand from the lockdown economy of one year ago. A comparison with pre-COVID 2019 is less alarming:

June, 2021: Brisket $5.49/lb

The annual inflation measurements are being boosted by comparisons with figures from last year during pandemic-related lockdowns, when prices plummeted because of collapsing demand for many goods and services. This so-called base effect is expected to push up inflation readings significantly in May and June, dwindling into the fall.

Compared with two years ago, overall prices rose a more muted 2.5% in May.

Policy-makers are currently behaving as if the inflation spike is temporary.

Despite his fears, your humble blogger hasn't seen convincing evidence that they're mistaken. Like last year, when our worries were about a different subject, we're forced to trust that the experts know what they're doing. And it worked so well the last time....

Buying and Holding Does Not Mean Sleeping

Chevron (CVX): bought at $84.83 on 8/21/20, sold at $94.80 on 1/19/21.

Your humble blogger hasn't visited a casino in a couple of years and scratches that gambling itch by dabbling in short-term trades.The record is mixed and ST trading can't be relied upon as a source of income. The long-term approach is buy-and-hold for 95% of the portfolio and has worked much better.

Last summer the recession wrecked the fossil-fuels industry. The large oils, e.g., Exxon and Chevron, fell to less than 50% of their two-year highs. They became attractive investments, as their dividend yield was near double digits and provided protection against further drastic declines. Also, I guessed that the switch to alternative energy would occur more slowly than the optimists predicted and that when the world economy came back these stocks would show healthy gains.

I bought Chevron (CVX) as it climbed back to $84.83 on August 21st and watched bemusedly as it fell nearly 20% over the next couple of months (the $1.29 quarterly dividend provided a smidgeon of comfort with its 6% annualized yield).

When CVX rose after the November election, I felt some measure of vindication and planned to hold it for a couple of years at least. The economy will come back eventually, fossil fuel usage--probably not coal--will surge, and Chevron, Exxon, Schlumberger, Occidental, Apache, etc. should all be good investments.

Recently there has been a spate of good news about battery technology, which is bad news for the fossil fuel industry.

Tesla announces ‘tabless’ battery cells that will improve range of its electric cars

Inexpensive battery charges rapidly for electric vehicles, reduces range anxiety

Range anxiety, the fear of running out of power before being able to recharge an electric vehicle, may be a thing of the past, according to a team of Penn State engineers who are looking at lithium iron phosphate batteries that have a range of 250 miles with the ability to charge in 10 minutes...The researchers also say that the battery should be good for 2 million miles in its lifetime.

If I had to guess, I think Chevron still has room to run. But there's no sense being a hog. I took my 14.8% profit (gain plus dividends) over 5 months (35% annualized) and got out.

Even if you're buying and holding, you have to check your assumptions occasionally.

Time to Hit the Road

$161,000-$268,000: too expensive for this newbie.

Adding to the list of things I thought I would never do, I've started following the Recreational Vehicle (RV) market.

When summer travel partially opens up, there are two near-certainties: gas will be cheaper than it has been in generations, and COVID-19 standards of cleanliness in hotels, airplanes, and car services aren't guaranteed.

RV's provide a solution--see America without having to worry about bedbugs or worse.

PS: RV culture spans generations. From 2018:

Retiring baby boomers remain a sweet spot for RV brands...But marketers are reporting new interest from younger buyers, including millennials and Gen Xers who are opting for RV vacations over hotel and airline travel. In 2016, the average age of an RV owner was 45, compared with 48 the year before...Even young families are embracing the RV lifestyle, partly because it's a lot easier to work remotely than it used to be.

PPS: I picked up 300 shares of Winnebago (WGO), about $11,000, in the IRA. It won't make me rich if the RV market booms or devastate the portfolio if the guess is wrong, but it's more interesting and fun to back hunches with real $$.

Take My Oil, Please

Oil storage tank (it's a model) for sale on Amazon.

Another effect of coronavirus economics that even experts have a tough time explaining:

CNBC: An oil futures contract expiring Tuesday went negative in bizarre move showing a demand collapse

West Texas Intermediate crude for May delivery fell more than 100% to settle at negative $37.63 per barrel, meaning producers would pay traders to take the oil off their hands.

Your humble blogger has never traded commodities and remembers vaguely from long-ago finance classes that future oil prices are dependent on today's ("spot") price, interest rates, and storage costs.

But the biggest factor can be buyers and sellers' estimate of future supply and demand . A producer can sell oil today, for example, at around $20 per barrel but might be willing to commit to deliver oil at a $15 price in July if the producer thinks demand will be soft.

Oil markets have been pessimistic before, but the futures price has never been negative. The closing price in the headline means that the seller will pay a "buyer" $37.63 to take a barrel of oil on May 1st. I was tempted to place an order to take delivery of oil and get paid for doing so, but I don't have a place to put 1,000 barrels, the minimum size of a futures contract.

The anomalous situation will undoubtedly right itself tomorrow, but there have been too many glitches in the Matrix recently:

Governments voluntarily killed their economies for a month or longer, akin to doctors stopping the patient's heart to perform an operation.

A roaring economy and stock market have collapsed into a deep recession and bear market, respectively, in a matter of weeks.

After a primary season with more than two dozen contenders, the Democrats have picked the worst candidate possible. Anybody in the Boston phonebook will perform better in a debate with Donald Trump.

Celebrities voluntarily broadcast their images without make-up, and many just look like ordinary people.

Market Bottom Not Here Yet

Including today's drop (so far), the markets are down 10% from a week ago, 20% from the highs.

As of 11 a.m. Eastern Daylight Time the stock market indices are down 6-7% (it's pointless to give an exact number; it changes materially every second). I've nibbled a little but the markets keep going lower, a reminder of the old Wall Street saying: "never try to catch a falling knife."

Thoughts:

The markets began falling last month when the coronavirus and a Bernie Sanders presidency, though unlikely, factored into investors' analyses.

With Bernie's chances receding, a Saudi oil-price war has replaced the socialist bogeyman. But aren't low oil prices great for consumers? Not in this case, because the Saudis are behaving like classic monopolists: bankrupt the weaker players as well as alternative energy companies, then raise prices.

The market's best case is an announcement that a coronavirus vaccine has been developed.

The second-best case is that treatments like Gilead's remdesivir stop the sick from getting worse.

The third-best case is that the contagion (inevitably) spreads in the U.S. and U.S. fatality rates show that the coronavirus is 2x or 3x worse than the flu. The worst case is that the disease is 10x as bad or more.

If we can take the worst case off the table, everyone--businesses, governments, consumers--can adjust accordingly. That will signal the market bottom.

I wish I had more cash to invest....

Doin' It Different Because We're Better

Gas price map from https://gasprices.aaa.com/

I pulled into the South City Costco gas station. The price was $3.939 per gallon, 30 cents higher than last week.

Quick thought--it must be another Mideast crisis; it can't be the economy, which appears to be slowing.

Nope, the AAA website didn't show a national spike. What was puzzling and galling was the map's average nation-wide price of $2.636.

The Wall Street Journal explains why our prices are 50% higher on a commodity: [bold added]

Gas prices in the Golden State have shot up 30 cents a gallon in the last week amid problems at in-state refineries to a statewide average of $4.03 a gallon and may be headed higher. Prices rose a mere 10 cents nationwide in the week after the attacks on Saudi facilities and have since ticked down a few cents.

A big reason gas prices didn’t spike after the Saudi attack is growing U.S. shale oil production, which has doubled since 2012 to about 12.5 million barrels a day and added about six million barrels to global supply. This has more than offset the 5.7 million barrels that were temporarily knocked out of Saudi production.

Yet oil production in California has declined about 18% since 2012 as older wells are exhausted and regulatory costs make it less profitable to drill new ones. California has made up for its declining domestic production by importing more foreign oil by tanker, especially from, you guessed it, Saudi Arabia—which emits more CO2.

Regulatory costs have also forced many refiners in the state to close. The California Energy Commission notes that “the cost of complying with environmental regulations and low product prices will continue to make it difficult to continue operating older, less efficient refineries.” Few refineries outside of the state produce the unique fuel blends required by California.

Thus when California refineries experience problems, retailers must import foreign gasoline at steep prices, a challenge partly exacerbated by the outages in Saudi Arabia. Add California’s 61-cent-a-gallon gas tax—the highest in the country—and this is why its gas prices are now nearly $1.40 higher than the U.S. average and $1.70 more than in Texas.

Gov. Gavin Newsom recently remarked that “Saudi Arabia is showing us how dependent we are on foreign oil.” By “we,” he means the royal California.

I blame the rich, greedy oil companies that like to rip off Californians but go easy on the rest of the country (sarc!).

Related -- CNN May, 2019 headline on Venezuela: Why the country with the world's largest oil reserves faces gas shortages. California isn't as bad as Venezuela, but just give us time.

California: The Government We Deserve

The Bay Area tops another list, one not to be proud of: [bold added]

In 2017 potholes closed Highway 101 by Palo Alto (NBC)

The Bay Area has the worst roads in the nation, according to a new report by TRIP, a Washington, D.C.-based transportation research group, that seeks to bolster a campaign by California transit officials to preserve the state’s recent gas tax hike.

Seventy-one percent of the streets in San Francisco, Oakland and nearby cities are dilapidated, and the average motorist loses $1,049 a year in repair costs from driving on the bumpy pavement, the report said. The San Jose area has the second-worst roads, with 64 percent in poor condition.

Last year California raised its State gas tax to the second highest in the nation (53.5 cents per gallon). Coupled with our unique, expensive gasoline formulation, California is neck-and-neck with Hawaii, which has to ship in its petroleum, for the country's most expensive gas.

In two weeks we'll vote on Proposition 6 , a measure that would repeal the gas-tax increase. Naturally all the powers that matter want to leave the taxes in place to fix the "worst roads in the nation", but the real question, of course, is how come we have paid so much and the results are so abysmal?

The one-party State says it's my way or the broken-down highway. We keep voting them in, so I guess we're getting the government we deserve.

Hard to Defend

Nov. 16th: 210,000 gallons spilled in SD (WSJ photo)

In news that was largely overlooked last month (not by you, dear reader) the Keystone Pipeline sprang a leak.

the rupture in the pipe may have been caused by a weight placed on the pipeline during its construction meant to keep it from floating in groundwater.

Although I believe that the benefits of Keystone outweigh the costs, incidents like these make the pipeline hard to defend. The owner had given assurances that technological and engineering advances had minimized the environmental risks, but now they look like the worst stereotype of greedy capitalists who care not one whit for the environment. (It's the second leak since the beginning of 2016.)

Note: for historical perspective here are the 10 worst oil spills in history. 1989's Exxon Valdez at 11 million gallons doesn't even make the list.

Black Gold: Brown v. Green

Kern County: not as pretty as San Francisco (SF Gate photo)

Real news - deep blue, deep green California is the third leading oil-producing state behind Texas and North Dakota [bold added]:

Kern County alone pumps more oil than Oklahoma, accounting for more than 70 percent of California’s production and more than 90 percent of its fracked wells. While the miles of photogenic melon fields, almond orchards and vineyards get the magazine covers, for more than a century the county’s financial strength has been its place as California’s oil patch.

Since the 1890s, the county has been the epicenter of the state’s energy industry, with 44,284 active wells pumping some 144 million barrels of oil in 2015, according to the state Division of Oil, Gas and Geothermal Resources.

“In Kern County, oil and gas is a $4 billion industry with lots of well-paying jobs,” said Nick Ortiz, president and CEO of the Greater Bakersfield Chamber of Commerce. “It’s a huge part of our economy, and the taxes we collect are very important to Kern County and our residents.”

Here's the fun part: Governor Jerry Brown, well known for his strong views on climate change, refuses to move against the California fracking industry. His resistance has aroused the ire of putative environmental allies:

“It’s hypocritical for Brown to call himself a climate leader,” said Catherine Garoupa White of Californians Against Fracking, a coalition of environmental groups. The governor’s support for fracking “is a huge smear on Brown’s green record.”

The state needs to move to an economy with 100 percent clean energy and get out of oil,” said Dan Jacobson, legislative director for Environment California. “The governor needs to play a leadership role in getting us off oil.”

Governor Brown talks a good game, but he's too much of an experienced politician to embrace all the tenets of the green revolution.

since California residents now drive about 330 billion miles a year, most of it in vehicles powered by gasoline or diesel, there’s a long way to go.

“California is only producing 30 percent of its oil,” Brown said. “The rest comes in ships, mostly, but increasingly in trains.”

Cutting the state’s oil production without cutting demand just means that more of California’s oil will come from other states or other countries, which may not have the strong restrictions on fracking and oil production that California now has.

“I don’t believe that makes sense,” Brown said.

Keep talking like that, guv'nor, and people might think you are a climate-change (whisper) denier.

Not a Conundrum to Everyone

Producers hire tankers for long-term storage (Arabnews)

The price of West Texas Intermediate crude oil has fallen from its 2011 peak of over $100 per barrel to about $34 today. While producers understandably have experienced financial pain, consumers far outnumber producers, hence the net effect of the price drop on the world economy should be positive, but so far it hasn't played out that way. 

The current oil conundrum has baffled economists [bold added]:

Cheaper fuel should stimulate global economic growth. Industries that use oil as an input are more profitable. The benefits to consuming nations typically outweigh the costs to producing ones. But so far in 2016 a 28% lurch downwards in oil prices has coincided with turmoil in global stockmarkets. It is as if the markets are challenging long-held assumptions about the economic benefits of low energy prices, or asserting that global economic growth is so anaemic that an oil glut will do little to help.

The low price of oil negatively affects far more than the petroleum sector. The burgeoning alternative energy industry (wind, hydro, and especially solar) depends on a moderate differential, not a chasm, between its cost and oil, and alt-energy capital projects and equity prices have been scaled back. Lower costs on cleaner forms of energy have accelerated the shift away from a battered coal industry. Loan defaults and bankruptcies from levered energy companies are like aftershocks to a financial sector still recovering from 2008.

The pain is immediate, while the widespread benefits are realized more slowly. If the world can avoid political instability from stressed producers, in a few years we'll wonder what the fuss was all about. Meanwhile, enjoy the $2 gas.