Why are California gasoline prices higher and more variable than others?

The State of California operates its own reformulated gasoline program with more stringent requirements than Federally-mandated clean gasolines. In addition to the higher cost of cleaner fuel, there is a combined State and local sales and use tax of 7.25 percent on top of an 18.4 cent-per-gallon federal excise tax and an 18.0 cent-per-gallon State excise tax. Refinery margins have also been higher due in large part to price volatility in the region.

California prices are more variable than others because there are relatively few supply sources of its unique blend of gasoline outside the State. California refineries need to be running near their fullest capabilities in order to meet the State= s fuel demands. If more than one of its refineries experiences operating difficulties at the same time, California=s gasoline supply may become very tight and the prices soar. Supplies could be obtained from some Gulf Coast and foreign refineries; however, California=s substantial distance from those refineries is such that any unusual increase in demand or reduction in supply results in a large price response in the market before relief supplies can be delivered. The farther away the necessary relief supplies are, the higher and longer the price spike will be.

California was one of the first states to ban the gasoline additive methyl tertiary butyl ether (MTBE) after it was detected in ground water. Ethanol, a non-petroleum product usually made from corn, is being used in place of MTBE. Gasoline without MTBE is more expensive to produce and requires refineries to change the way they produce and distribute gasoline. Some supply dislocations and price surges occurred in the summer of 2003 as the State moved away from MTBE. Similar problems have also occurred in past fuel transitions.

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Source: http://www.eia.doe.gov

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