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As California gas prices soar, political heat rises

By Braden Reddall and Erwin Seba

SAN FRANCISCO/HOUSTON (Reuters) - California Governor Jerry Brown on Sunday ordered pollution regulators to let service stations stock winter-grade gasoline early after an abrupt price spike last week sent some pump prices past $5 a gallon and left residents fuming.

Wholesale markets indicated that prices would likely ease in the coming days, but the political fallout may be just beginning. U.S. Senator Dianne Feinstein wrote a second letter on Sunday asking for federal regulators to investigate possible price manipulation in the California gasoline market.

A series of refinery mishaps have constrained gasoline supply in California, which is largely cut off from U.S. national pipeline and refinery networks and thus more subject to supply and price disruptions.

Reuters reported on Friday that a "short squeeze" in trading markets may have also played a role in an unprecedented wholesale price increase of almost $1 a gallon last week for California-grade gasoline.

Brown's order will allow retailers to begin selling winter-blend gasoline, which is more plentiful and easier to make but emits more polluting vapors, ahead of the traditional October 31 transition date.

"Allowing refiners to make an early transition to winter-blend gasoline could quickly increase fuel supply and provide a much needed safety valve with negligible air quality impacts," Brown said in a letter on Sunday to the California Air Resources Board, which regulates the types of gasoline sold in California.

The Air Resources Board issued regulations late on Sunday allowing the immediate manufacture, importation, and sale of winter-blend gasoline.

Feinstein, in a letter to the Federal Trade Commission (FTC), called for the agency to implement broad monitoring of oil-trading markets and investigate possible "collusion."

"Publicly available data appears to confirm that market fundamentals are not to blame for rising gas prices in California," she wrote, citing state data that showed gasoline production last week was almost as high as a year ago and that gasoline and blending components were equal to this time last year.

The California senator cited Reuters' Friday report on the "short squeeze," in which traders said refiner Tesoro Corp had to scramble to buy fuel from other companies to meet commitments.

While traders told Reuters that no single party appeared to be withholding supply intentionally and that there was no suggestion anyone conspired to drive up prices, Feinstein wrote: "An FTC investigation is likely the only way to determine whether this reported squeeze took place."

SUPPLY BOOST COMING

California traditionally has some of the highest gasoline prices in the United States, but the gap has widened dramatically over the past week. Average retail prices hit a peak of $4.655 a gallon on Sunday, compared with a national average of $3.814 a gallon.

The supply constraints have been largely attributed to problems at several of the state's biggest refineries.

An August 6 fire shut down the key crude refining unit of Chevron Corp's 245,000 barrel-per-day plant in Richmond, California. On October 1, prices rose on news of a power failure at Exxon Mobil Corp's 149,500-bpd Los Angeles-area refinery in Torrance, California, though the company said operations were restored by Friday.

Analysts said the decision to move up the state's transition to winter gasoline would give a significant boost to the fuel pool.

"Gasoline supply will go up 10 percent with the change to winter-blend gasoline," said David Hackett, president of Stillwater Associates, an energy consultancy in Irvine, California. "That's like adding another Exxon Torrance."

Bob van der Valk, a refined products market analyst from Terry, Montana, said proprietary oil company pipelines from the refineries would be able to start shipping winter-blend gasoline right away.

But Kinder Morgan Energy Partners, which operates the largest pipeline network on the West Coast, has set an October 15 start date for when it will accept winter-blend gasoline for shipment.

Reduced gasoline availability forced some retailers to turn off their pumps. Costco shut 14 of 40 filling stations in the Los Angeles area late last week, although on Sunday, the firm's website said all California stations were now open.

Southern California has borne the brunt of the supply disruptions and has seen the highest prices in the state.

In her letter calling for the FTC to establish a permanent market-monitoring team for oil and gasoline markets, Feinstein noted that California commuters already faced the highest gas prices and the longest commutes in the country.

"Paying hundreds of dollars to fill your tank every time you go to the pump is untenable, particularly because it does not appear the price spike and supply disruption are in any way related to supply and demand," she added.

"I fail to understand why the FTC has not yet set up its own unit to oversee oil markets."

(Reporting by Braden Reddall in San Francisco and Erwin Seba in Houston; Editing by Jonathan Weber, Diane Craft and David Brunnstrom)

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