(Bloomberg Opinion) -- Gasoline prices are up everywhere. But when network news broadcasts need to illustrate just how bad things have gotten, they usually send a reporter to stand in front of one of three gas stations in Los Angeles.
I visited all three on Wednesday. At the Shell station on Olympic Boulevard where it intersects with Fairfax Avenue and San Vicente Boulevard, regular gas was selling for $6.99 a gallon. At the Chevron on Alameda Street between Chinatown and the Pueblo de Los Angeles historic district it was $7.29. Leading the way, at $7.35, was the Mobil on La Cienega Boulevard across from the Beverly Center mall.
That's less than European drivers pay: $7.35 a gallon is $1.94, or 1.76 euros, a liter, and prices of more than 2 euros a liter seem to be standard these days. There's also a gas station along the Central California coast near Big Sur that charges more. But by U.S. standards, $7.35 a gallon is pretty shocking, which is why TV journalists keep trooping to the corner of Beverly and La Cienega Boulevards for their visuals.
This is maybe not the most responsible journalistic practice. Few Americans are paying anywhere near $7.35 a gallon for regular gas — the national average price is $4.32 — and few Angelenos are either. Most of the gas stations I saw during my drive Wednesday were selling regular for less than $6 per gallon, and a few were selling it for less than $5.50. Still, I did see people tanking up at $7.35 a gallon, and $5.50 is much more than gas costs almost everywhere else in the country. Both these phenomena seem worthy of a closer look.
In the case of L.A.'s three super-pricey gas stations, Sam Dean of the Los Angeles Times already did most of the legwork. In an article published this week, he quotes customers who seem to be (1) price-insensitive, mostly because they were using corporate cards, (2) price-inattentive or (3) just buying a gallon or two because they were afraid they were about to run out. He also gets the guy behind the pricing strategy of the Mobil at Beverly and La Cienega to explain it, sort of:
When reached at his office, the owner and operator of the gas station, Charles Khalil, said that there's no economic mystery behind his prices: People shopping around the Beverly Center are just willing to pay.
He's operated the location since 1990 and kept the prices above average since the beginning. “I always kept my pricing even, my profitability and everything even, 30 years to today, always the same,” Khalil said.
Beverly and La Cienega is one of those high-stakes, high-stress intersections where if you make a wrong turn it can take a while to remedy your error. Along with the eight-story, 90-store Beverly Center there's a Target-anchored mall on another corner, and the giant Cedars-Sinai Medical Center a block away. People driving by that Mobil station have other things on their minds than getting the best deal on gas.
The Chevron on Alameda Street, meanwhile, is at the edge of a big downtown gasoline desert, and is near tourist attractions, some freeway onramps and offramps and Union Station, a stop for Amtrak, commuter-rail, light-rail and subway trains and home to a couple of car rental outposts. The Shell on Olympic is at a three-way intersection near some tourist attractions — the Peterson Automotive Museum, Los Angeles County Museum of Art and La Brea Tarpits — and is the only gas station on Fairfax between those attractions and the freeway. Still, it's in a mostly residential area and seems least suited of the three to be a high-price leader. It was also almost deserted on Wednesday.
That gas stations with less competition and less-informed or more-rushed customers charge higher prices is well-established. For a 2010 doctoral dissertation at the Pardee Rand Graduate School in Santa Monica, for example, Florencia Jaureguiberry examined gasoline prices in California and found that stations more than two miles from the nearest competitor charged an average of 1 cent a gallon more than others, and those located near airport rental-car locations charged 4 cents more. In a city as vast and car-clogged as Los Angeles, there's apparently opportunity for at least a few gas stations to charge much higher premiums than that.
Driving east on Olympic from the $6.99 Shell station I could sort of see how the business model works. A half mile away, a Sinclair station charging $5.49 a gallon was packed. A bit farther along, a Shell station charging $5.79 was … about as empty as the one charging $6.99. The cheapest stations will pull in crowds of price-sensitive GasBuddy users, but higher up the scale the price differences may have less impact on demand. The average retailer markup on gasoline in 2021 was 30.9 cents per gallon, according to NACS, the Association for Convenience & Fuel Retailing. Add a dollar or more to that, as L.A.'s Expensive Three seem to be doing, and you can make money at pretty low customer volumes.
It can't hurt that gasoline prices in Los Angeles are so high to start with, and volatile too, which brings us to the second part of our examination. In the first week of March, according to the U.S. Energy Information Agency, Los Angeles gas prices were $1.11 a gallon above the national average and statewide California prices were $1.09 higher. The state's highest-in-the-nation gas taxes account for a bit more than a quarter of this difference — at 68 cents a gallon, they're about 27 cents above the national average. The rest is a hard-to-disaggregate mix of environmental regulations and the state's status as a “gasoline island” not directly connected to the rest of the nation's oil and gas infrastructure, the combined effects of which have apparently grown a lot over the past decade.
California became a gasoline island for reasons of geography and geology. It's separated from the country's other oil-producing and refining regions by vast distances and rugged mountains, and it used to produce more than enough oil to satisfy all its needs. The state was the world's top oil-producing region in the 1900s and 1910s, and was self-sufficient in oil into the 1950s. Along the way it built up a big enough refining industry that when imports became necessary, they arrived as crude and were transformed into gasoline in-state.
In the late 1940s California also began its long battle against air pollution, with the Legislature passing a law enabling the creation of the first-in-the-nation Los Angeles County Air Pollution Control District. These efforts have led to ever-stricter limits on refinery emissions, as well as the requirement that gasoline sold in California be formulated differently than in the rest of the country. That raises production costs an estimated 10 to 15 cents a gallon, and also reinforces the state's gasoline-island status, as not many refineries outside California can even make the same stuff. Refiners in the state, meanwhile, have consolidated and in some cases retrenched in the face of the state's environmental rules and commitment to phasing out gas- and diesel-powered vehicles (an executive order signed in 2020 by Gov. Gavin Newsom requires that by 2035 all cars and passenger trucks sold in the state be emission-free).
To some extent this is deliberate environmental policy, supported by most Californians, that seems to be working as designed. The air in Los Angeles is a lot cleaner than it used to be, and more than 12% of cars and light-trucks sold in the state in 2021 were electric, compared with just 4% nationwide. That still leaves a long transition ahead, though, and aspects of it may prove ugly for those who still need gasoline.
The state's remaining refiners have more market power than they used to, and limited ability to compensate when one of their number shuts down for maintenance or other reasons, making prices both higher and more volatile. Fuel retailing has been heading in the opposite direction, with the state's top brands (Chevron and Arco) losing gasoline market share in recent years to mostly lower-cost, unbranded and supermarket/big-box retailers. As gas stations attempt to transition to the electric-vehicle era with business models built around longer customer visits and more non-fuel revenue, they could find that hard to do on expensive urban land.
The Expensive Three in L.A. have only modest convenience-store offerings and limited space to expand them. Beverly Center Mobil owner Charles Khalil told the L.A. Times that he's planning to shut down the station and sell the land as soon as his current franchising agreement expires. His take-it-or-leave-it pricing strategy may gain new adherents among the stations that remain, as their numbers most likely shrink with the growing prevalence of electric vehicles.
More From Other Writers at Bloomberg Opinion:
- Cars Are About to Get Dirtier, and Pricier: Anjani Trivedi
- We Already Have a Solution for Oil's Price Shock: David Fickling
- Suspending the Gas Tax Isn't the Answer to Inflation: Editorial
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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