Many commercial real estate leases today have an annual increase in rent. These rent increases are based upon either a flat rate or based upon the consumer price index increases or a combination of both.
Fuel is a major component of the consumer price index as well as other market goods and services purchased by households. In fact, last quarter prices for fuel dropped 20 to 30 percent in the nation but not in Southern California. This drop in fuel should decrease the cost in many other goods and services as well as your commercial lease.
There have been many articles written about the plunging cost of crude oil saving the consumer money and improving the economy; however, the twelve year low price of crude oil which was at $30.76 per barrel as of Tuesday has had no effect on lower gas prices in Los Angeles. On the other hand, Southern California gas prices jump overnight every time crude oil increases minimally in the global economy. This is simply manipulation to the consumer by big oil companies.
The California Global Warming Solutions Act of 2006 (AB32) signed by Govenor Schwarzenegger increased California gas prices by about 0.10 cents per gallon due to the cost of compliance, according to Dave Clegern of the California Air Resources Board. In addition, The state requires oil companies to create a special blend of gasoline in the summer. Volatile organic compounds used in the winter blend of gasoline expand in the summer and create ozone depletion, according to Clergern. However, the winter blend is pretty much the same as every other state. The summer blend costs the consumer in California about an extra .07 cents per gallon, Clergen added.
In addition to the 0.17 cents extra per gallon consumers pay in California, state taxes play a significant role in the cost of fuel. In California the cost per gallon of gas includes 0.59 cents in state taxes. However, it is only 5th on the list for highest gas taxes in the nation. Pennsylvania has the highest tax rate of .69 cents per gallon, and the average cost per gallon in Pittsburgh was only $2.13 on Tuedsay. The average price per gallon of gas in Los Angeles was $3.02 as of Tuesday, according to gasbuddy.com. That is well over the .17 cents per gallon cost for the AB32 cost of compliance and the summer blend cost. It’s not even summer yet; therefore, Californians can expect to see an increase in gas prices closer to summer, since the oil companies start making the summer blend earlier in the year.
The factors that help determine price of fuel are the cost of oil, proximity to refineries, refinery capacity and taxes. The consumer is aware that crude oil prices are down. We have no lack of refineries located all over Los Angeles County from El Segundo, Torrance, Carson, Wilmington and Santa Fe Springs. The Exxon Mobile Refinery which had an explosion in February 2015 has been closed since.
How do gas prices get raised during record low crude oil prices from OPEC? California oil companies shut down refineries for all sorts of unplanned reasons. The price of a gallon of gas goes way up when refineries are closed or partially shut down. Two refineries have partially closed in Los Angeles, according to Allison Mac an Analyst at gasbuddy.com due to unplanned maintenance issues. A refinery in Carson and a refinery in El Segundo were partially closed, and the companies are not telling the public when they will reopen, Mac said. However, she did say the supply seems to be replenishing and that prices will be going down until the summer blend costs go into effect; As a result, the high cost of fuel is increasing the lease price for commercial real estate due to passed on costs to landlords and owners.
A company ready to sign a commercial real estate lease should make sure it is pegged to a consumer price index (CPI). Also, the company should insist if the CPI decreases that the rent will decrease. Most experts have cautioned that inflation is about to hit us and the CPI will increase. Not so fast, our dollar is getting stronger in the world and so inflation may not happen so quickly. Janet Yellen increased the federal cost of funds. It has been almost a decade since the last change. I wonder how Janet must feel now after our dollar has been surging to new highs. If our dollar remains strong, then the price of oil will decrease since oil is bought and sold in U.S. Dollars.
In college it is taught in economics that the cost of fuel is a regressive cost. Translated to the consumers it hits the segment of the population that can least afford it. As a result, Southern California gas prices disproportionately impacts low income and ethnically diverse groups and small businesses.
In the President’s State of the Union Speech on Tuesday, President Obama said; “we’ve cut our imports of foreign oil by nearly 60 percent and cut carbon pollution more than any other country on Earth.”
California leads the nation in energy efficiency standards on cutting carbon emissions. In addition, the Golden State lead the nation with electric vehicle plug-in car sales and hybrid cars in 2014, according to greencarreports.com. Maybe that is why nobody in Los Angeles is concerned about the fact that they are paying the highest price per gallon for gas in the nation.