California's cap-and-trade no more than road bump in gasoline's steep price decline

— Drivers in car-crazed California paid more than 10% more for their gasoline at the start of the year. They just didn't realize it.

As expected, California's introduction of the emissions cap-and-trade program for transportation fuel suppliers boosted Los Angeles regular gasoline rack prices nearly 17 cents in the first two days of 2015 to $1.5885/gal. The rack is the wholesale level where gasoline and diesel is moved onto those often-shiny tanker trucks that hold roughly 9,000 gallons.

What barely changed right away was the price up and down the supply chain.

The spot market, where 25,000-barrel lots (more than 1 million gallons) of Los Angeles CARBOB grade gasoline are traded, went from $1.3722/gal December 31 to $1.3832 on January 2, the first trading day of the new year. The retail price, where drivers pump 25 gallons into their Chevy Suburban, rose 0.9 cents to $2.637/gal in that same span and was still 5 cents below the previous week's average price, according to American Automobile Association data.

Three weeks on, L.A. prices for the spot, rack and pump have all kept moving in one direction: down.

Rack prices dipped below pre-C&T levels January 13 to $1.3816/gal and were at $1.3766/gal January 20, down nearly 5 cents from the end of 2014, according to the Telvent/DTN survey of rack prices for Platts. Spot prices were at $1.2593/gal, down more than 11 cents, Platts data showed. Gas station prices were at $2.516/gal, also down about 11 cents in 2015, AAA data showed.

Traders said that, as expected, the brunt of the new rule was felt at the wholesale level, with a sharply declining oil complex providing an opportune time for any cost increase, like one that isn't technically a carbon tax but is called such by many in the industry.

"There's so much built into the price of gas profit-wise that the gas stations or companies are absorbing the new taxes," one market source said. "The tax hit is at the rack."

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Traders have said the spot market cost has historically ranged from 70 cents to $1 under the retail level on a trailing basis, taking into account taxes, logistics and other factors. But that spread was more than $1.25/gal at the start of the year as gas stations catch up to a freefall in global oil prices. It remained that wide three weeks later. The source said drivers likely saw no effect at the pump, due to the sheer luck of the change happening in a such a falling oil market for the refiners and others who have to account for the added cost.

"They have the ability to absorb the taxes without raising the street prices, and without raising the ire of consumers," he said.

California expanded its cap-and-trade scheme January 1 to cover its 14 petroleum refineries and other fuel suppliers, requiring them to hold enough permits to cover their greenhouse gas emissions. Obligated parties short of their required number of permits could buy them from others that have a surplus. When the ownership of a gallon of fuel shifts as it crosses the wholesale rack distribution point, an obligation to account for that carbon content of the fuel is generated. The cap-and-trade program is not new, but was expanded January 1, 2015, to cover the wholesale exchange.

Platts data showed that the rack rates in 2014 averaged 5 cents higher than the spot market for California-specific gasoline grade known as Los Angeles CARBOB, with a wide variance tied more to wild swings in the spot trading market more than any volatility in the wholesale price.

That spread rose from a 5.03-cent premium December 31 to a 20.53-cent premium January 2. On January 20, it was down to 11.73 cents.

For perspective, on January 21, 2014, the spot price was $2.5682/gal and rack price $2.6175/gal for a 4.93-cent premium. The price at the pump: $3.634/gal.