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A Gasoline Shortage Despite Plenty Of Fuel

Across southern California, gas pumps are closed for business. Bloomberg reported last week that rationing and a spike in wholesale prices have left gas station owners, especially independent ones, scrambling to eke out a profit as the price per gallon approaches the $5 mark.

John Ravi, owner of a gas station located 30 miles outside Los Angeles, told Bloomberg, “I can get gas, but it’s going to cost me $4.90 a gallon, and I can’t sell it here for $5.” Instead, he’s just putting “out of gas” signs on his pumps as he sells down what supply he has on hand.

For motorists of a certain age, the situation brings back unwelcome memories of the 1970s, with its shortages and long lines at the pump. Yet unlike that period, nationally the U.S. is flush with fuel. American crude oil production is at its highest level in years. As of 2011, we’re actually a net exporter of refined gasoline and diesel for the first time since 1949. So why are gas stations in California shutting down for lack of supply?

The simple answer: This is what happens when a once national market for a product is shattered into over a dozen regional markets.

There are currently 18 different gasoline formulas required in different areas of the country. Though gas faces a variety of specific factors that affect supply and demand depending on the state and region, including varying fees and taxes, it’s the formula differences that pose the biggest problem in a situation like the one California currently faces.

Even if there were pipelines that could bring gas to California from other states, California retailers could not legally sell it, since it would not meet regulatory standards. Nor can gas stations in southern California simply truck down supplies from the Bay Area, where gas is currently expensive but still sellable, since northern Californian merchants are already selling winter-grade gas, while retailers in the southern part of the state are required to sell summer grade until October 31. The state has been slow to issue a waiver that would allow winter-grade gas to get the L.A. area through the crisis.

Are there reasons behind all the requirements for customized gasoline in different micromarkets in the country? Absolutely. California, with its huge concentration of cars and its related serious air pollution problems, has better reasons than most.

But every decision has its costs as well as its benefits. The failure to standardize a reasonably effective product across the country carries the cost of making customers rely on small batches of customized gasoline that are expensive to produce and susceptible to supply disruptions. Broader national or regional formulas would create a more robust market that would be less vulnerable to interruption and could help get a handle on prices in markets like southern California, where they are currently out of control.

We need to come up with a more thoughtful approach to how we make and market fuel in this country.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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