Environmental laws fuel gas hikes.

The unprecedented 45 cent-per-gallon jump in California's gasoline prices over the past six weeks -- twice the national average -- has prompted the usual outcry of price gouging by big oil companies, refiners and gasoline stations.

But there's another factor that goes beyond those likely targets -- California's strict environmental regulations that have forced refineries to comply with mandates for two new fuel blends.

When direct and indirect costs of these two changes are added to the price of gas in California, the pump price jumps another 15 cents a gallon compared with other states. Some economists throw in an additional 10-cent premium that oil companies and refiners are adding as hedges during this period of short supply.

"California has always paid more for gasoline because of environmental regulations' said Philip K. Verleger, an economist and senior fellow at the Council on Foreign Relations. "But the switch to these blends and short supply adds a premium to the cost and consumers are paying that premium every day."

Unlike most other states, California's gasoline infrastructure has been hit with two simultaneous requirements: conversion to ethanol, a corn-based additive that is replacing MTBE to control smog; and the annual switch in March to an expensive summer blend of gasoline.

These switches could not have come at worse time. The prospect of a war with Iraq and a cut in Venezuelan supplies have pushed crude oil prices to near record levels of $39 per barrel, and domestic oil inventories have been depleted.

So what might have been only a 15 to 20 cent bump in gas prices -- significant but not out of line with temporary hikes in previous years -- has turned into a record-breaking 45-cent hike in just six weeks, to more than $2.10 a gallon.

All this is not to discount the possibility that oil refining companies have raked in excess profits, instituted so-called "zone pricing" policies (where wholesale oil prices are hiked even more in certain ZIP codes) or prolonged plant shutdowns deliberately to drive up prices.

The rapid price hikes have spurred calls from Gov. Gray Davis and both U.S. senators from California to investigate allegations of price gouging and market manipulation. Meanwhile, the state Attorney General's office is in the midst of a long-running investigation into the oil industry and its pricing policies.

But these allegations have been made repeatedly by state officials and consumer groups and could take years to prove, especially since the records of refinery shutdowns are not made available to the public.

Ethanol switch

Furthermore, the price hikes are not exactly a surprise.

As early as 1999, the California Energy Commission projected that gas prices would jump 10 cents a gallon with the conversion to ethanol, prompting Gov. Davis to extend by a year, to Jan. 1, 2004, the deadline for refineries to switch to ethanol from MTBE (methyl tertiary butyl ether).

Wary of liability from MTBE contamination of groundwater, most oil companies and refineries made the switch ahead of schedule. Some produced the ethanol blend in January.

But this month, when refineries annually switch to a mandated summer blend of gasoline, many refineries ran into trouble producing the reformulated summer blend into a new "cocktail" with the ethanol additive. Further compounding the problem is that more crude oil is needed to produce ethanol-added gasoline.

In addition, some refineries have been shut down for weeks longer than expected, further drawing down local gas supplies.

The already-tight market is further constrained because only 13 refineries in California make the special blend of reformulated gasoline. When supplies are low, those refiners have been forced to buy from only three companies worldwide that produce the unique blend: Irving Oil Ltd. of Canada, Iso-Octane Co. of Dubai, and Fortum of Finland.

"Because the switch from MTBE to ethanol actually costs supply, it means imports have to increase and now refiners are waiting for tankers to show up from Finland to supply the California market," said Dave Hackett, president of Stillwater Associates, an Irvine consulting firm.

Different recipe

California long has been an isolated gasoline market.

For starters, the basic gasoline -- before any additives like ethanol or MTBE are put in -- is a different mixture in California than elsewhere and has been for nearly 20 years. Called reformulated gas, or RFG, it is more costly to produce and supplies in the state often run low. This is one reason why California gas prices have always tended to be at least 10 cents higher than the national average.

One version of this reformulated gas has been at the center of a decade-long dispute between Unocal Corp. and other gas refiners. Unocal obtained a patent for the reformulation, forcing other oil companies to pay it a licensing fee. Other oil companies have filed suit to overturn the patent and the case remains on appeal.

The Federal Trade Commission sued Unocal earlier this month for fraud and anti-competitive practices for its patents for the summer reformulated blend. The FTC claims that the patents, unless remedied, could cost California consumers more than $500 million a year in higher gasoline prices, or an extra 5 cents a gallon. In addition, the oil companies have had to go around the patents to make their own reformulated blend.

The one regulatory factor that has received the most attention has been the phasing out of MTBE and the conversion to ethanol, produced primarily by agri-giant Archer Daniels Midland Corp.

Under the federal Clean Air Act Amendments of 1990, California was one of handful of states required to have an additive in its gasoline called oxygenate. At the time, it was believed that oxygenates were essential to reduce smog-forming emissions. There are two generally used oxygenates: MTBE, which has since been found to contaminate local water supplies, and ethanol, which is a corn derivative.

With MTBE contamination rapidly becoming a public health crisis when Davis took office, he ordered a conversion from MTBE to ethanol.

This conversion, involves more than simply equipping refineries to handle a different type of fuel additive. According to California regulators, oil industry officials and analysts, the conversion to ethanol has impacted gas prices in several ways:

* Because ethanol is a lighter substance than MTBE, it takes up only half the volume per gallon of gasoline as MTBE. So, to produce the same 15 gallons of gas to fill the average gas tank, it takes 5 percent more refined fuel or crude oil.

With near-record oil prices and dwindling national reserves, purchasing more crude oil to produce the same amount of gas adds another 10 cents a gallon to the final cost.

* Because ethanol is so volatile, more chemicals have to be removed from the base fuel mixture when the refineries are converted to handle the switch to summer fuel. Overhauling more plumbing when switching to summer fuel could explain why some refinery shutdowns have been longer than expected, according to Robert Schlichting, spokesman for the California Energy Commission.

This is a major factor in the overall retrofitting of storage tanks and refineries to handle the extremely volatile ethanol liquid, which adds from 4 to 7 cents to the cost of a gallon of gas.

* Because ethanol can eat through conventional pipes used to transfer gasoline from the refineries to offloading terminals (to put into tanker trucks), the ethanol has to be added to the basic gasoline at the storage terminals through separate hoses.

This cost is estimated to be another 5 to 6 cents a gallon.

Additive challenge

In the middle of the dual conversion process, one unit of BP America's oil refinery in Carson, which alone supplies 15 percent of the Southern California market, was taken out of production for longer-than-expected routine maintenance.

The refinery shutdown tightened gas supplies and contributed to a 17-cent spike in gas prices on March 5, said Hackett.

The BP refinery in Carson was hit last week with a record $319 million fine from the South Coast Air Quality Management District for repeatedly violating environmental rules governing storage tanks. A BP spokesman said the investigation is unrelated to any plant shutdowns.

As for what, if anything, can be done to stem future price increases; the state is engaged in a broad-based attack on the federal requirement for oxygenates. If this requirement is waived, state officials say ethanol would no longer be required and that could knock at least a dime off per-gallon energy prices.

The state Air Resources Board has filed suit in the Ninth Circuit Court of Appeals in San Francisco to overturn the EPA rule. But if that fails, the state faces long odds.

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Here are the casts breakdowns of a gallon of gasoline.

Crude oil: 88 cents

-10 cents for refinery hedging costs

-78 cents for other costs, including need to purchase additional crude oil to offset loss of MTBE additive

Refinery costs: 55 cents

-7 cents for refinery retrofits to handle both ethanol and "summer blend" gas

-6 cents for blending the ethanol in separate hoses into the refined fuel, either onsite or off ite

-42 cents for other standard efinery costs

Taxes: 51 cents

-18 cents for federal excise tax 

-18 cents for state excise tax

-15 cents for local sales taxes

Dealer costs: 14 cents

Sources: California Energy Commission, Business Journal research