Gas, earthquake insurance experts share insights

May 25--Reasons behind the unpredictability of gas prices and higher cost in California plus the financial repercussions of not having earthquake insurance were explained Tuesday morning by two industry experts visiting Rancho Bernardo.

San Diegans and others in Southern California pay an average of 70 cents per gallon more for gasoline than drivers in other parts of the country for a combination of reasons, said Hector Infante, the policy, government and public affairs manager at Chevron in Orange County, San Diego County, Arizona and Nevada.

Infante and California Earthquake Authority CEO Glenn Pomeroy spoke at North San Diego Business Chambers' Actionable Economics forum held at Sony Electronics.

"What drives the prices is complex," Infante said, explaining price is a combination of crude oil costs, refinery costs, taxes and distribution/marketing. Using the example of gas at $2.775 per gallon, he said $1.032 of that is crude oil costs. An additional 29 cents is distribution, 83.4 cents is refinery costs/profits, 1.4 cents is for a state underground storage tax, 6.1 cents for state/local taxes, 36 cents for state excise tax and 18.4 cents for federal excise taxes.

Supply and demand impacts crude oil prices nationwide and U.S. production has nearly doubled. Saudi and Nigerian oil companies are fighting for the Asian market and newer players include Canada and Russia. With all of these sources, oil companies are not investing in as much exploration or projects and are laying off workers, he said.

Due to the industry's unpredictability, Infante said experts have "no way to know what is going to happen" with gas prices. Since crude oil is cheaper now than in 2014, the price is likely to rise in the future, but saying when or by how much is impossible.

Regarding California's prices -- on average, about 70 cents per gallon more -- some is attributable to refinery costs, specifically special blends, the summer blend plus cap and trade.

"Crude oil drives the price of gas, but how we process it plays an important role in the price of gas," he said.

Refinery costs are impacted by the federal government's standards to improve the country's air quality. He said California's requirements are tougher so its gas is cleaner with fewer emissions. "This is creating why people in California pay more," Infante said. "We have one of the cleanest gas in the world, but that does not come cheap."

Special blends account for a 20 cent-per-gallon hike, while the summer blend -- a unique mix with lower volatility and emissions -- accounts for 10 to 30 cents of the price nationwide, with an additional 7 or 8 cents in California. The state also switches to the summer blend earlier than the rest of the U.S. and uses it longer, he said.

California implemented its cap and trade regulation for gasoline and fuels on Jan. 1, 2015, which is designed to cap major sources of greenhouse emissions. Since companies cannot supply enough low carbon fuels, they must purchase pollution permits and that cost is passed on to consumers. He said state officials know there will not be emissions compliance and can count almost $3 billion being added to the state's budget through this regulation that accounts for around 12 cents per gallon.

"California has one of the highest gas taxes ... more than 46 other states," he added. "The taxes go to transportation projects, but the status of its infrastructure ranks really low compared to other states."

He said California is isolated from other markets and its refineries operate at or near maximum capacity, which makes gas more vulnerable to short-term spikes if a refinery goes off-line. "(Drivers recently) paid $1 more (per gallon) when a refinery was down," he said.

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Pomeroy said the earthquake insurance industry has recently undergone changes that make residential earthquake insurance policies less expensive and more attractive.

He said earthquake risk is real, most Californians live within 30 miles of an active fault line and most San Diegans within 15 miles.

"We have 99.9 percent of a chance of (experiencing) a 6.7 magnitude or larger earthquake sometime in the next 30 years," Pomeroy said.

The not-for-profit California Earthquake Authority formed in the aftermath of the 1994 Northridge quake after insurance companies were canceling residential policies due to the financial repercussion of providing earthquake coverage, he said. It has 23 member companies and 880,000 policy holders.

If a similar quake hit today, he said there will likely be $75 billion in residential damage, with $7 billion of that on insured properties.

Pomeroy said many myths surround earthquake insurance benefits. These include an "it won't happen to me" mind-set, the government will bail homeowners out, their existing homeowners insurance policy covers earthquakes and insurance costs too much, provides too little coverage and the deductible is too high.

"It was, but not now," he said, explaining the average policy premium has decreased 55 percent of that in 1996, while housing reconstruction costs have risen 168 percent. Policies have increased personal property coverage from $5,000 to offering up to $200,000 in coverage, the 15 percent deductible has been replaced by options ranging from 5 to 20 percent, loss of use coverage has gone up from $1,500 to policies offering up to $100,000, and now owners of older homes who do retrofitting can receive up to a 20 percent discount, while there was none offered 20 years ago.

Pomeroy said California homeowners can get coverage and premium estimates by using the CEA's premium calculator at earthquakeauthority.com.

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