California Screamin'

 | Oct 08, 2012 | 4:30 PM EDT
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California's runaway gasoline price inflation is likely to spread everywhere soon. While there are differences between the local gas market in California and the rest of the nation, many of their recent problems can easily come to a gas station near you. Five-dollar-a-gallon gas could be a reality for the rest of us.

One reason that California gas is so expensive is stringent state emissions standards. Those standards dictate very specialized refined gas, more expensive to make and available only from a few refiners. That relative shortage of refiners selling "clean gas" to the West Coast is another reason. A recent fire and subsequent shutdown of a big Chevron (CVX) refinery has dropped the supply of California-grade gasoline available, and local traders have done the rest of the job speculating into the market and driving prices to record highs.

But don't think California's gas problem is altogether its own and not likely to be seen elsewhere. There are similarities in refining everywhere that portend higher gasoline and distillate prices going into 2013.

It's not really about the price of the crude barrel, for a change. I outlined recently a few reasons why crude prices should have limited upside from here, but refined products are independently priced from crude oil. Some serious refining trends that have been brewing for years are accumulating now to create local, and even national, refined-product shortages.

Most important has been the lack of new infrastructure. A fully new refinery hasn't been built in the U.S. in decades, and the current refinery fleet is being held together with little more than duct tape and baling wire. Fires and maintenance shutdowns are more a result of tired refineries that are too old and decrepit to be reliable. This lack of new construction and minimal maintenance has been made far worse by a business model that's had its margins squeezed by modern financial markets, the mechanism of which I outline in my book, Oil's Endless Bid.

So, refineries are old and haven't been profitable in years. Add to that the recent turnover of important refineries on the East Coast with others, like Sunoco (SUN) and Shell (RDS.A), just getting out of the business and you have the prerequisites to refined-product shortages that can come at any time, as they have in California.

I'm not convinced that the prospect of higher gas prices makes the independent refiners a great bet here, as shares of Valero (VLO), Tesoro (TSO) and CVR Energy (CVI) have already run massively. But it's true that when gas prices go up, these shares ratchet higher too.

What we can say is that California's problems are only temporarily unique to them. With as little fundamental reason as there is, we are likely to see the same kind of squeezes in supply and the same jumping prices down the road.

Get ready.

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