California gasoline prices appear to be headed for a big drop. Here’s when and how much
Gasoline prices in California could fall 50 to 90 cents a gallon very soon.
That’s the view of experts such as Patrick De Haan, head of petroleum analysis for GasBuddy, which tracks prices.
Severin Borenstein, an energy economist at University of California, Berkeley, predicts a plunge of at least 50 cents a gallon “within the next week.”
“Retail prices will be coming down very substantially in California,” he said.
DeHaan had expected the drop to be even greater — 70 cents to $1 a gallon — until the OPEC Plus oil producing nations announced Wednesday they intended to implement big supply cuts.
The cuts could mean short-term price increases, said Sanjay Varshney, professor of finance at California State University, Sacramento. Borenstein said that the reductions could translate into a pump price increase of 12.5 cents a gallon.
“In normal times, that might be noticeable, but I think it will be swamped by the drop in retail prices due to the loosening of California supply constraint,” he said..
The price of gasoline in California has soared in recent weeks and has been flirting all week with the state’s all-time high of $6.44, set in June. Average for a gallon regular in the state Thursday was $6.42, AAA reported, up from $5.27 a month ago. Thursday’s national average was $3.87.
Despite the OPEC decision, Varshney and other experts said gasoline prices could be stabilizing or even dropping over the next few weeks.
Demand could fall as the economy stumbles. The early switch to a winter blend of gasoline should help. And more refineries could begin operating again.
“There’s no reason for this to continue after a month. You would expect things to stabilize,” Varshney said.
None of the prices are guaranteed, of course. Prices could stabilize if the Biden administration adopts ways to boost the domestic oil supply. Or they could jump, as hurricanes are still possible in Gulf Coast states. And while the economy is slowing, consumers remain confident, which usually means they’ll keep spending.
But the chief causes of the sudden jump in prices should be remedied, experts said.
About two weeks ago the California spot market for gasoline shot up by about two dollars per gallon, Borenstein noted.
“This was unrelated to crude oil prices, but rather reflected a shortage of California gasoline, probably caused by refineries being down for maintenance and in one case unplanned disruption,” he explained.
“Some of those refineries are now increasing output and Gov. (Gavin) Newsom moved forward the switch to winter blend gasoline, which frees up additional supply due to the change in formulation.”
Why gas prices should plunge
These are some of the factors that give analysts hope the California price will drop:
▪ The economy slows. All indications are not only that it’s slowing, but could be inching toward a recession. The Federal Reserve Board has raised its key interest rate five times this year and is expected to do so again next month.
As demand slows, so should the price of oil.
“The possibility of slower-than-forecast economic growth creates the potential for lower prices,” said the federal Energy Information Administration in an analysis last month. It saw the national average for a gallon of regular gasoline dropping to $3.61 next year.
The UCLA Anderson forecast last month projected a barrel of crude oil should average $79 next year, down from $95 this year. Oil recently has been trading between $80 and $90 a barrel, far from the $120 levels earlier this year.
▪ The switch to winter blend gasoline. During the summer, California refineries have to produce gasoline that will help curb pollution. Winter blends don’t have such strict requirements, and are less expensive to produce.
Newsom last week told refineries to start their winter blends immediately rather than wait until next month.
Predictions vary about the impact of the early change. Newsom’s office said prices should go down, noting that when this was done 10 years ago, prices dropped within two weeks.
But at AAA, spokesman John Treanor said, “We do not know what impact that will have on prices.”
▪ Refineries come back on line. While shutdowns for maintenance are routine, California has been hamstrung this fall by refinery shutdowns for unforeseen reasons. Complicating the problem is that it’s difficult to move products to the state.
“At least six California refineries are undergoing maintenance, and there is limited pipeline supply to the West Coast from locations east of the Rockies,” said AAA’s Andrew Gross.
The refinery problems have created a “supply shock” for the state, Varshney said.
But, he added, “Assuming that gets sorted out I see no reason prices should continue rising in California.”
This story was originally published October 6, 2022 at 10:55 AM with the headline "California gasoline prices appear to be headed for a big drop. Here’s when and how much."
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