Feinstein seeks investigation of California crude price gap

By: EDMOND JACOBY - Staff Writer | Monday, January 24, 2005 8:08 PM PST ∞

Although motor fuel prices are higher in California and Pacific coast states than anywhere else in the continental United States, the relative price of California crude oil has been dropping ---- so much so that the state's senior U.S. senator, Democrat Dianne Feinstein, has called for a congressional investigation of the phenomenon.

Citing a report by a petroleum industry consulting company that noted a recent pattern of rapid and unexplained widening in the differentials between California crude oils and other benchmark oils, such as West Texas Intermediate, Feinstein asked in a letter to the comptroller general, who heads the Government Accountability Office, for an investigation into the cause of the growing price gap. She suggested that the expanding price spread could be the result of intentional underpricing in an attempt by oil companies to avoid paying higher royalties to the state for the oil they extract.

According to some estimates, California refiners process about 1 million barrels of California crude every day, so the amount of royalties involved could run to hundreds of millions of dollars per year.

Examining market prices during a two-year period, the report by Innovation and Information Consultants Inc. of Concord, Mass., concluded that the price difference between West Texas Intermediate and Midway-Sunset crude oils had nearly doubled, from about $5.80 to $10.30 per barrel. The West Texas oil is always more expensive than Midway-Sunset, which is produced in Kern County in the San Joaquin Valley because the Texas product has low sulphur content, while the heavy California oil is high in sulphur and therefore costlier to refine.

But as the world oil price has risen, Texas' oil has risen right along with it, while California oil has risen less dramatically. Alaskan North Slope oil also has risen less than the West Texas Intermediate, but more than California crude, the report said.

"In the last two to three months, there has been a very dramatic shift upward in the differential as a percentage of the crude oil price," the report stated. "This increase in the differential raises questions as to its cause."

The report also found that the increasing differential could not be attributed to differences in inventories of crude oil held by refiners in California and the rest of the country.

"If there is a huge reported spread, that would raise some real questions," said Severin Borenstein, director of the California Energy Institute at UC Berkeley.

"Those prices should move together. I certainly wouldn't consider it implausible that the oil companies would try to manipulate prices to minimize their royalties," he said.

"Western oil companies only have control of prices in a very narrow range, but these may not be real prices they are manipulating, just reported prices, just as in the electricity crisis. But I don't know of any evidence of it, and I haven't seen the study," he said.

Feinstein's Washington office supplied a copy of the report to the North County Times, but the senator was not available for comment.

Contact staff writer Edmond Jacoby at (760) 739-6675 or ejacoby@nctimes.com.