WTI crude oil is a widely traded oil that is commonly used as a benchmark  for measuring crude oil prices in the United States. Price Differentials between California and Other Crude Oils Have Fluctuated Significantly over the Past 20 Years but Have Risen Significantly in Recent Years

From December 1987 to August 2006, price differentials between WTI and  California crude oils fluctuated significantly, generally increasing since  mid-2004 and reaching a high in January 2005. This recent increase in crude  oil price differentials coincided with a general increase in world crude oil  prices and reflected a more rapid increase in WTI prices relative to prices  of the three California crude oils we evaluated (Kern River, Thums, and  Line 63). Because WTI rose faster than California crude oils, price differentials  between California crude oils and WTI also increased during this period. Since mid-2005, price differentials for the three California crude oils and  the two imported crude oils have moderated somewhat but remain high by  historical standards. Changing Conditions and Events in Global Crude Oil Markets Have Affected Price Differentials

EIA and other officials we interviewed told us that price differentials  between light and heavier crude oils are driven primarily by supply and  demand economics in the global crude oil and petroleum products markets  and stated that these factors have influenced recent trends in price  differentials between heavy California crude oils and the light crude oil  benchmark WTI. For example, increases in the supply of light crude oil  result in lower prices for those crude oils, which would decrease the price  differential in comparison to heavy crude oil, such as those oils typically  produced in California. EIA officials and others stated that this caused  prices of WTI to rise at a faster rate than heavy crude oils and contributed  to rising price differentials between WTI and heavier crude oils such as  those produced in California. This causes the price differentials between WTI and heavier oils to rise  further. Consequently, the price  differential between these two crude oils expanded from about $6 to about  $15. Local and Regional Events Have Affected Prices of Specific Crude Oils and Markets

Local and regional events, such as hurricanes off the U.S. Gulf Coast and  refinery outages, can cause fluctuations in the price of crude oils produced  in the region and benchmark crude oils. The resulting  oversupply of crude oil in a region with comparatively low demand  prevented the price of the regional crude oils from increasing similar to  WTI prices, causing a large price differential. In the past, the state of California alleged that  crude oil companies in California manipulated crude oil prices to lower  their royalty payments to the federal government. Objectives, Scope, and Methodology

The objectives of this review were to determine (1) the extent to which  crude oil price differentials in California have fluctuated over the past 20  years and (2) the factors that may explain the recent changes in the price  differential between California’s crude oil and others. To determine the extent to which California crude oil price differentials  have fluctuated over time, we obtained data on the spot prices of the North  American benchmark crude oil, West Texas Intermediate (WTI), and three  California crude oils: two heavy crude oils (Kern River and Thums) and an  intermediate crude oil (Line 63).
Why GAO Did This Study

California is the nation's fourth largest producer of crude oil and has the third largest oil refining industry (behind Texas and Louisiana). Because crude oil is a globally traded commodity, natural and geopolitical events can affect its price. These fluctuations affect state revenues because a share of the royalty payments from companies that lease state or federal lands to produce crude oil are distributed to the states. Because there are many varieties and grades of crude oil, buyers and sellers often price their oil relative to another abundant, highly traded, and high quality crude oil called a benchmark. West Texas Intermediate (WTI), a light crude oil, is the most commonly used benchmark in the United States. The price difference between a crude oil and its benchmark is commonly expressed as a price differential. In fall 2004, crude oil price differentials between WTI and California's heavier, and generally lower valued, crude oil rose sharply. GAO was asked to examine (1) the extent to which crude oil price differentials in California have fluctuated over the past 20 years and (2) the factors that may explain the recent changes in the price differential between California's crude oil and others. GAO analyzed historical data on California and benchmark crude oil prices and discussed market trends with state and federal government officials and crude oil experts.

What GAO Found

California crude oil price differentials have experienced numerous and large fluctuations over the past 20 years. The largest spike in the price differential began in mid-2004 and continued into 2005, during which the price differential between WTI and a California crude oil called Kern River rose from about $6 to about $15 per barrel. This increase in the price differential between WTI and California crude oils occurred in a period of generally increasing world oil prices during which prices for both WTI and California crude oils rose. Differentials between WTI and other oils also expanded in the same time period. The differentials have since fallen somewhat but remain relatively high by historical standards. Recent trends in California crude oil price differentials are consistent with a number of changing market conditions. First, beginning in mid-2004, Middle East producers began to increase the supply of heavy crude oils in the world marketplace, which helped depress prices for heavy crude oils, including those produced in California, and contributed to the expanding price differential between California crude oils and WTI. Second, the price differential of California crude oils to WTI increased when the rise in global crude oil prices caused prices of light crude oils to increase faster than the prices of heavier crude oils. This occurred because the petroleum products from heavy crude oils compete against other fuels, such as coal. Third, events that only impact regional crude oil markets or individual crude oils can also affect price differentials. For example, in September 2004, Hurricane Ivan disrupted crude oil production in the U.S. Gulf Coast region, resulting in decreases in the region's crude oil supply. The resulting scarcity of crude oil in the Gulf Coast region caused the prices of WTI and other regional oils to increase relative to crude oils produced outside the region. This also would have increased the price differentials between WTI and California crude oils. Finally, manipulation of crude oil prices could also affect price differentials, but experts and officials GAO interviewed generally believed that this was not a factor during this recent period.