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California Targets Two Trading Companies Over Fuel Prices, But Diesel Isn't Part Of The Lawsuit

The California Attorney General this week went after what it said was a scheme to inflate fuel prices in California, where prices at the pump are always significantly higher than the rest of the country.

Benzinga · 05/08/2020 15:14

The California Attorney General this week went after what it said was a scheme to inflate fuel prices in California, where prices at the pump are always significantly higher than the rest of the country.

But from the perspective of a trucker paying those prices, there's one problem with the action –  the lawsuit in federal court doesn't even mention diesel. 

In the suit brought by the office of the state Attorney General Xavier Becerra in the state court system, California charges that two well-known trading companies – Vitol and SK Energy –  conspired for months before and after a refinery explosion in February 2015 to drive up the price of gasoline in the state. That explosion occurred in equipment known as an FCC unit, which converts intermediate products, primarily one called vacuum gasoil (VGO), into gasoline.

But that fact is one of the reasons why in the period that California says its gasoline prices soared as a result of the FCC explosion and the alleged Vitol-SK Energy scheme, diesel prices ended up pretty much where they started. 

VGO is an intermediate product that can be used to make gasoline in an FCC unit or it can be hydrotreated to produce diesel. The economics of the market at any given time, along with contractual obligations, will determine how much VGO a refinery will send to make gasoline and how much it will send to make diesel. 

With an FCC unit down, a refinery will inevitably send more of its VGO output into the diesel stream to make an increasing amount of that fuel. At the Torrance refinery (owned then by ExxonMobil, now owned by PBF Energy), it wouldn't have been able to send it to the FCC unit, because it had exploded; it would have been sent to make diesel.

The increases in gasoline prices that spurred the action by the AG's office were substantial. According to the weekly Energy Information Administration/Department of Energy (EIA/DOE) retail gasoline price data, the average for all grades of gasoline in California right before the explosion stood at $2.491/gallon.  Five weeks later, it was at $3.489/g. 

It got as high as $3.859/g on May 18. But even by the end of the year, it was still more than 30 cents greater than diesel prices.

During that period, diesel mostly shrugged. According to the EIA/DOE price, California diesel was $3.09/g before the explosion. It climbed about 14 cents/g in six weeks but a few weeks later was back to its $3.09 mark. And as noted, at the end of the year, diesel's price of $2.609 was about 33 cents less than gasoline.

Still, the suit is notable in that it spells out elaborate cooperation between Vitol and SK Energy to impact the price of gasoline as set by OPIS, an oil price reporting agency whose prices have long been the benchmark in California. It charges that the two companies worked together to impact the OPIS price by engaging in "loss leader" transactions, where the done deals made no sense economically but could have an outsized impact on the OPIS price. The benchmark would be moved and the companies would benefit on the volumes tied to the benchmark, which would be in far greater quantities than that in the loss leader deal. 

(It should be noted that most if not all production and revenue accounting systems have taken steps in recent years to install procedures to stop precisely the type of activity that the Attorney General spells out in the lawsuit).

The suit also does note that California is a unique market, an "island"  in the fuel world. The suit notes that there are no pipelines that take fuel into California, that its environmental specifications are more stringent than anywhere else in the country and virtually all of its fuel is produced inside the state. "When unexpected supply disruptions occur, it can be difficult to find immediate alternative sources of supply due to California's stringent…specifications and relative geographic isolation," the lawsuit said. 

That doesn't include just gasoline. California's diesel specifications are unique to the U.S. – to the world, actually – and it shows in the EIA/DOE prices for that state. Since the start of 2017, the weekly California EIA/DOE average diesel price has averaged 68 cents more per gallon than the national price, has been as high in a week as 98 cents/g more and most recently stands at 80 cents/g more than the national price.

California retail diesel prices Source: SONAR