No end in sight for state’s gasoline woes

Monday, March 8, 2004 | 10:56 a.m.

Las Vegas will remain one of the most expensive places in the nation to buy gasoline for years to come, even if retail prices retreat from their current record highs.

That's because no quick fix is available for two dilemmas Southern Nevadans face:

They get all of their refined gasoline from California, a state whose refineries have not kept pace with consumer demand, meaning the slightest hiccup in production causes petroleum shortages and price spikes at the pump.

They pay the second highest combined state and local gasoline taxes in the nation to fund road construction and maintenance.

Senate Minority Whip Harry Reid, D-Nev., has called on the Federal Trade Commission to investigate the gasoline price hikes, and Nevada Attorney General Brian Sandoval plans to meet with other attorneys general in the West to discuss the issue. But state Consumer Advocate Timothy Hay said Nevada's powers are limited in this arena.

"There's not really a lot that we can do," Hay said. "We monitor the prices in an attempt to make sure that they're not price gouging, and that is difficult to pin down. Most of the factors that contribute to high prices in the West are situational disruptions in the marketplace because California has limited refining capacity."

Gov. Kenny Guinn supports Reid's call for a federal investigation but is not contemplating any state action at this time, according to Guinn spokesman Greg Bortolin.

"We're at the mercy of large companies outside our state, and we're not alone in this," Bortolin said.

If you think it would be easy for Nevada to turn elsewhere for gasoline and lower its gas taxes, think again.

"If there was an easy way to lower gas prices, someone would have come up with that solution a long time ago," Sean Comey, spokesman for AAA Nevada, said.

Gasoline supplies

One of the real problems is that Nevada, which trails only California and Hawaii in the retail price of gasoline, is at the mercy of a national supply network that favors certain states over others.

The network is a maze consisting of 160,000 miles of oil pipelines that connect refineries -- where crude oil that comes from the ground and from deep-sea exploration is blended with chemical compounds -- to storage-tank depots. The refined gasoline that is piped to the depots gets mixed with locally required fuel additives, such as clean-burning ethanol in the case of Las Vegas. It is then placed in tanker trucks and delivered to gas stations.

An analysis of the network prepared for the National Association of Convenience Stores in Alexandria, Va., showed that the areas that benefit most from this system are Gulf Coast states, where there are major refineries, and midcontinent states such as Oklahoma, Missouri, Kansas and Nebraska. These two regions have more gasoline than they need, which explains why they have some of the nation's lowest gasoline prices.

On the other extreme is Nevada, an isolated outpost of the oil supply network tethered to California by a pair of pipelines that link Southern California with Southern Nevada and Northern California with Northern Nevada. The reason for these pipelines is that Nevada has no refineries of its own.

"You're conjoined at the hip with us whenever we go through any problems," said Claudia Chandler, spokeswoman for the California Energy Commission.

One might think that neighboring Utah would be in a similar situation, but it is not. Utah, where gasoline is at least 30 cents a gallon cheaper, is part of a circular network of pipelines that connects that state to Wyoming, Idaho, Montana, Washington and Oregon. The gasoline in that loop can flow in both directions.

Arizona, where gasoline is about 15 cents less expensive than in Las Vegas, gets its petroleum from California and west Texas. A new pipeline owned by Longhorn Partners Pipeline of Dallas that will connect El Paso with the refinery region in Houston this summer will allow Arizona to import more of its oil from Texas. That could reduce Arizona's reliance on California, meaning more gasoline potentially could become available for Nevada.

But Las Vegas motorists don't have any choice when it comes to the source of their gasoline. They must rely on a 248-mile pipeline owned by Kinder Morgan Energy Partners of Houston that runs from Colton, Calif., to the tank depot at 5049 N. Sloan Lane near Nellis Air Force Base.

The California Energy Commission, that state's energy planning agency, has suggested that another pipeline be built that would connect Las Vegas with Phoenix so that Southern Nevada could also get gasoline from Gulf Coast refineries. That potentially could mean lower prices for Las Vegas consumers.

"We are just beginning to recognize the growth of the Southwest market," Longhorn spokesman Michael Patterson said. "There are people in the industry studying that marketplace to see whether facilities need to be built there, but it's premature to say anything is a reality."

Pipeline hurdles

Industry experts say an oil pipeline from Las Vegas to Phoenix, if it happens, could face several hurdles and take years to become reality.

Lisa Adair, vice president of Muse, Stancil & Co., an energy industry consultant in Dallas, said she has heard informal talk "that it would be nice if Las Vegas had choice like Arizona has choice" by tapping into multiple sources of refined gasoline. But Adair said she knew of no serious discussions to build a new oil pipeline for Las Vegas.

"I know there is growth in Nevada but it is still considered a small market," Adair said. "There is also no more pipeline capacity from El Paso to Phoenix. So there would have to be an expansion of that pipeline."

Industry experts say Kinder Morgan would be the company most likely to build a new Las Vegas oil pipeline since it owns the Las Vegas-Colton and Phoenix-El Paso pipelines. The company in the past 18 months has expanded gasoline, diesel and jet fuel storage capacity at its Las Vegas depot by nearly 35 percent to meet growing consumer demand.

But Kinder Morgan spokesman Rick Rainey declined to discuss the company's construction plans.

Oil pipelines are normally built and owned by large corporations or joint ventures. They won't build pipelines if they don't think there is money to be made from the tariffs they charge refineries and other oil vendors. And the industry has been slow to add new pipelines in recent years.

Although the actual construction of a pipeline can be a rather speedy process if the terrain is relatively flat, it can take years to secure the necessary rights-of-way and local government environmental permits to make the project a reality, according to Marty Matheson, director of pipelines for the American Petroleum Institute, a Washington trade association.

"There are people who don't want pipelines in their back yard," Matheson said.

And Tim Hamilton of McCleary, Wash., a petroleum industry consultant and critic of the oil industry who frequently testifies before government panels on behalf of consumer groups, said that there is no guarantee oil shipments from Texas will lower gasoline prices in Las Vegas.

He said that's because most of the same companies that run California's refineries also operate the Gulf Coast refineries and would not want to do anything to disrupt the high petroleum prices coming out of California.

"The refining company in Texas is not going to send gas into Las Vegas to undercut the price in California," Hamilton said.

Refinery woes

Western States Petroleum Association President Joe Sparano, whose trade group is based in Sacramento, said that demand for gasoline in California is growing by 2.6 percent annually but that refinery capacity is increasing by only 0.6 percent annually. That means demand for refined gasoline is increasing at more than four times the rate that refineries can produce it.

Population growth plays a role in increased gasoline demand in California. So does the fact that more Californians have been forced to live in faraway suburbs with more affordable housing, causing them to drive greater distances to their jobs.

"Because you rely on California for your gasoline, you are vulnerable to the gap between supply and demand," Sparano said.

He said there are three reasons refineries have been unable to keep up with demand:

Refinery companies find it difficult to build or expand facilities because many Californians don't want refineries in their neighborhoods.

Construction permits are more difficult to obtain in California than elsewhere because of rigid state environmental standards.

The cost of building refineries -- at least $1 billion for an average facility -- is prohibitive.

Companies have expanded existing refineries, but the last new refinery in California was built in the 1970s.

"The problems with building a refinery are pretty significant," Sparano said. "It might take a couple years to get permits and a couple years to build it, so it might take about five years."

The result is a razor-thin margin of error for California's 13 refineries, he said.

The situation could get even worse because one refinery, a Shell Oil facility in Bakersfield, Calif., is scheduled to be closed permanently by October. That facility refines 2 percent of California's gasoline.

Industry experts say that the price increases in Nevada over the past month can be directly tied to two refineries in Martinez and Wilmington, Calif., that had unexpected production outages, coupled with scheduled stoppages of units at five other refineries that were converting their petroleum blends from winter gasoline to summer gasoline.

"One reason California prices got so high is that they produce their own special blends of fuel," Rayola Dougher, senior policy analyst for the American Petroleum Institute, said. "That makes a tight market even tighter. You can have a tiny shift in supply and prices can soar as oil traders bid upward and secure supplies for their customers."

For the week that ended Feb. 27, California refineries produced only 728,000 barrels of refined gasoline for Nevada, Arizona and Oregon, down 12.9 percent from the prior week. And inventories of refined gasoline for those three states plummeted from 1.1 million barrels to 740,000 barrels that week, a drop of 31.9 percent. Chandler said those drops led to the steep price increases in Nevada.

California refineries are not the only facilities that lack sufficient capacity. Chandler said the energy commission has been unsuccessful in convincing port officials in Long Beach, Calif., to expand terminals to handle more imported refined oil.

California, which imports about 10 percent of its refined gasoline from other countries, cannot import any more to prop up supplies because of the limited capacity of the Long Beach port to store gasoline before it is sent to a nearby distribution center and delivered to the state's oil pipelines.

"It's a local jurisdictional issue and the Long Beach Port Authority has not been interested in having that type of expansion," Chandler said. "They say they can make more money off-loading other products."

Hamilton and Hay said declines in refinery capacity and inventory did not materialize overnight. They said it has been 20 years in the making, as the oil industry has consolidated through acquisitions, refineries have been shut down, and those refineries that are left have gradually reduced their petroleum inventories.

"From 1985 to 1995, 10 refineries in California that represented 20 percent of the refining capacity were shut down," Hay said. "Part of that was due to the fact that there had been consolidation of ownership in the refineries. That capacity obviously has not been replaced.

"It means that we've had more of a concentration in the energy-refining market than we had previously. This has led to the present marketplace problems."

Today's California refineries have maintained barely enough production capacity to meet the public's needs, Hamilton said. He cited two reasons why refineries can get away with lower inventories than in the past: Technological advances have enabled them to more efficiently monitor the amount of gasoline consumed by motorists; and refineries can buy spare gas from competitors to prop up their own inventories without fear that the competitors will move in on their gas station customers.

"It's in their best interests not to break rank with each other because when all of their inventories are low, they can raise their prices," Hamilton said.

He said there are similarities between the current refinery issues and the situation that led to California's energy crisis that began in 2000 and stuck Nevada with higher electricity rates. Like the oil industry, electricity providers have been slow to build or upgrade power generation plants, a situation that eventually led to a shortage of electricity and higher prices.

The difference between the two scenarios, though, is that interstate electricity transactions are regulated by the Federal Energy Regulatory Commission. The only significant federal regulation of refined gasoline as it passes from one state to another has to do with the tariffs pipeline owners charge refineries and other gasoline vendors.

But Hamilton said one way to increase regulation would be for the federal government to require refineries to keep a certain minimum amount of spare refined petroleum on hand so that there aren't price spikes whenever there are unexpected refinery problems.

"California is helpless in this affair because the state cannot regulate interstate commerce," Hamilton said. "Congress could take action, but it never has. These congressional investigations won't go anywhere because we've called for them repeatedly. A politician gets a headline and then nothing happens.

"The investigators say they don't find illegal behavior and the oil companies say what they do is not illegal."

Industry representatives say any form of federal regulation would be bad for business. Instead, one alternative California oil refiners are pursuing is an easier way to obtain refinery construction permits.

"The Western States Petroleum Association is working with the California Energy Commission to revamp the permitting system," Sparano said.

Gas taxes

Even if Las Vegas somehow could obtain lower-cost refined petroleum for motorists, it would remain difficult to decrease state and country fuel taxes.

An American Petroleum Institute survey of gasoline taxes as of January found that Nevada had the second highest average in the nation, behind only Hawaii. Nevada motorists pay nearly 10 cents more per gallon in taxes than the national average, a major reason this state will continue to have expensive gasoline even if prices drop.

In addition to the 18.4-cents-per-gallon federal gas tax all motorists pay for interstate highway improvements and transportation grants for the states, Nevadans on average pay 33.2 cents per gallon in state and local gas taxes for road improvements.

"I would be surprised if we were able to lower the gasoline taxes," former Las Vegas Finance Director Marvin Leavitt said. "We have a rapidly growing area in Southern Nevada, and rapidly growing areas require a lot of new roads."

Part of the dilemma is that Nevada is only the 35th most populous state but seventh largest in land mass. Leavitt, who heads tax committees that advise the Nevada Tax Commission and Legislative Commission, said that means the state has to build and maintain long, costly highways that connect isolated communities.

The state average of 51.6 cents in total taxes per gallon -- compared with a national average of 42.7 cents -- is exceeded in eight of Nevada's 17 counties. Those eight, which include Clark and Washoe, average 52.205 cents per gallon in taxes. The difference is that motorists pay 10 cents in county gas taxes. In some less-populated counties such as Nye and Lincoln, motorists pay only 5 cents in county gas taxes.

State and county gasoline taxes raised $313.8 million last fiscal year, of which $176.6 million went to the state and $83.8 million went to Clark County.

"When the economy isn't good and fuel prices go up, sure I'll be outraged by the taxes, but we have to balance that outrage by how good we want our roads to be," said Carole Vilardo, president of the Nevada Taxpayers Association. "Road construction is one of the most capital intensive projects you can think of doing."

One irony of the increase in gasoline prices is that it also drives up the cost of road construction, since petroleum products are used to build roads. If motorists reduce their fuel consumption to save money, the tax revenue that the state and counties collect to build and maintain roads would also decline. And that could spell trouble for Southern Nevada, Leavitt said.

"We already have a substantial backlog of road work," Leavitt said. "We're also going to reach the point where newer streets will cycle through and need maintenance so the situation will get more severe. It would be extremely difficult to lower the gas taxes and still maintain the roads we want."

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