a

GAO

United States Government Accountability Office

Report to Congressional Requesters

January 2007 CRUDE OIL

California Crude Oil 

Price Fluctuations Are 

Consistent with 

Broader Market 

Trends

GAO-07-315
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

January 2007

CRUDE OIL

California Crude Oil Price Fluctuations 

Are Consistent with Broader Market 

Trends 

Highlights of GAO-07-315, a report to 

congressional requesters 

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. 

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. 

WTI and Kern River Crude Oil Price Differentials, December 1987 to August 2006 

0

4

8

12

16

U.S. dollars

Month and year

Aug.

2006

Jan.

2005

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

Dec.

1987

Source: GAO analysis of Platts data.

www.gao.gov/cgi-bin/getrpt?GAO-07-315.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim Wells at 

(202) 512-3841 or wellsj@gao.gov. 
Page i GAO-07-315 Crude Oil throughout Differentials

Contents

Letter 1

Results in Brief 3

Background 5

Price Differentials between California and Other Crude Oils Have 

Fluctuated Significantly over the Past 20 Years but Have Risen 

Significantly in Recent Years 12

Recent Increases in California Crude Oil Price Differentials Are 

Consistent with Other Market-Based Factors 16

Appendixes

Appendix I: Objectives, Scope, and Methodology 23

Appendix II: GAO Contact and Staff Acknowledgments 25

Tables Table 1: API Crude Quality Classes and Representative California 

Crude Oils 10

Figures Figure 1: WTI and Kern River Crude Oil Prices and Price 

Differentials, December 1987 to August 2006 4

Figure 2: Quantities of Crude Oil Grades Produced in California, 

1987 to 2005 6

Figure 3: Sources of California Crude Oil and Major Refining 

Centers, 2005 8

Figure 4: Quantities and Sources of Crude Oil Consumed in 

California, 1987 to 2005 9

Figure 5: WTI, Kern River, Thums, and Line 63 Crude Oil Prices and 

Price Differentials, December 1987 to August 2006 13

Figure 6: WTI, Maya, and Arab Heavy Crude Oil Prices and Price 

Differentials, July 1988 to August 2006 15

Figure 7: Wyoming Sweet and WTI Crude Oil Prices and Crude 

Price Differentials, December 1987 to August 2006 19
Contents

Page ii GAO-07-315 Crude Oil throughout Differentials

Abbreviations

ANS Alaska North Slope

API American Petroleum Institute

bpd barrels per day

CEC California Energy Commission

CIPA California Independent Petroleum Association

DOE Department of Energy

EIA Energy Information Administration

MMS Minerals Management Service

NYMEX New York Mercantile Exchange

OPEC Organization of Petroleum Exporting Countries

WSPA Western States Petroleum Association

WTI West Texas Intermediate

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-07-315 Crude Oil Differentials

United States Government Accountability Office

Washington, D.C. 20548

A

January 19, 2007 Letr

The Honorable Henry A. Waxman

Chairman

Committee on Oversight and Government Reform

House of Representatives

The Honorable Dianne Feinstein

United States Senate

California is the nation’s largest consumer of gasoline and consumes about 

44 million gallons every day. California is also the nation’s fourth largest 

producer of crude oil, behind Texas, Louisiana, and Alaska, and has the 

third largest oil refining industry, behind Texas and Louisiana. Despite a 

history of self-reliance in petroleum supplies, California crude oil 

production has been declining since 1996, and California increasingly relies 

on oil from other states and countries. California currently produces about 

37 percent of the crude oil it uses, with the remainder coming largely from 

Alaska, Saudi Arabia, Mexico, Ecuador, and Iraq. Crude oil is a globally 

traded commodity, so natural and geopolitical events worldwide can affect 

its prices. These fluctuations can affect state revenues because a share of 

the royalty payments collected from companies that lease state or federal 

lands to produce crude oil are distributed to the states. For example, in 

fiscal year 2006, the Department of the Interior’s Minerals Management 

Service (MMS), which collects royalties from federal lands, distributed 

more than $303 million to the states, with California’s share totaling over 

$44.7 million, or roughly 15 percent of the total state disbursements. States 

rely on these revenues to fund education and infrastructure projects and to 

assist local counties where the oil production occurs. Consequently, oil 

producing states typically monitor crude oil price fluctuations and are 

interested in ensuring that the crude oil produced in their state trades at a 

fair price in the marketplace. 

Crude oils produced from different regions and geologic structures vary in 

important ways that also affect each crude oil’s value in the marketplace. 

Specifically, the value of a given crude oil is determined by its inherent 

quality and the amount and value of petroleum products that can be refined 

from it. Crude oil is commonly classified according to two parameters: 

density and sulfur content. Less dense crudes are known as “light,” while 

denser crudes are known as “heavy.” Crudes with relatively low sulfur 

content are known as “sweet,” while crudes with higher sulfur content are 

known as “sour.” In general, heavier and more sour crudes require more 
Page 2 GAO-07-315 Crude Oil Differentials

complex and expensive refineries to process the oil into usable products 

but are less expensive to purchase than light sweet crudes. Because much 

of the oil produced in California is heavy and sour, California refiners have 

made significant investments in more technically complex equipment that 

enables them to process these crudes into higher value products such as 

gasoline, jet fuel, and diesel.

Because of the large number of grades of crude oils, buyers and sellers use 

benchmark crude oils as a reference in pricing crude oil. A benchmark 

crude oil is typically an abundantly produced and frequently traded crude 

oil. There are currently three widely used crude oil benchmarks—West 

Texas Intermediate (WTI), Brent, and Dubai. WTI is a very high quality light 

crude oil produced in Texas and refined in the Midwest and Gulf Coast, and 

it is typically the benchmark for crude oil produced in North and South 

America. Other oils are often priced with reference to one of these 

benchmark crude oils. The relationship between the prices of specific 

crude oils and a benchmark crude oil is commonly expressed as a price 

differential—calculated by subtracting the specific crude oil price from the 

benchmark price. For example, if WTI is selling for $60 per barrel and Kern 

River (a California crude oil) for $45 per barrel, the WTI-Kern River price 

differential is $15. 

Crude oil price differentials are generally not constant over time; they 

reflect changes in world crude oil markets, as well as more local or crude 

oil specific factors. When prices of the crude oil produced in a state fall to 

an unusual degree relative to prices of benchmark oils or similar quality 

oils, crude oil producers and state collectors of crude oil royalty revenues 

become concerned. In fall 2004, crude oil price differentials in California 

rose sharply when the price of WTI increased relative to California crude 

oils. In this context, you requested that we provide additional information 

on crude oil price differentials in California. As agreed with your office, this 

report discusses (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 

and other crude oils. To provide additional context for this report, we also 

evaluated recent increases in the price differential between WTI and crude 

oils produced in the Rocky Mountain region.

To determine the extent to which California crude oil price differentials 

have fluctuated over time, we obtained historical data on California and 

benchmark crude oil prices from Platts—a major provider of news and 

information on energy commodities. We obtained data on three California 
Page 3 GAO-07-315 Crude Oil Differentials

crude oils: two heavy crude oils (Kern River and Thums) and an 

intermediate crude oil (Line 63). We used these data to calculate price 

differentials by subtracting the price for California crude oils from 

benchmark crude oils and analyzing these differentials for trends over 

time. We also interviewed officials from the Energy Information 

Administration (EIA), MMS, and the California Energy Commission (CEC). 

To identify factors that may explain the recent changes in the California oil 

price differentials, we interviewed officials from EIA, MMS, CEC, and the 

California State Controller’s Office. In addition, we interviewed industry 

experts from state, regional, and national trade organizations, such as the 

California Independent Petroleum Association, the Western States 

Petroleum Association, and the Independent Petroleum Association of 

America; representatives from crude oil production and refining companies 

in California and the Western United States; and independent energy sector 

consultants. We also discussed the possibility of price manipulation with 

numerous officials and experts to determine whether or not it was a 

relevant factor in explaining recent changes in crude oil price differentials. 

We conducted our work between May and December 2006 in accordance 

with generally accepted government auditing standards. 

Results in Brief 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, for example, WTI and 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 of both WTI and California 

crude oils rose. Price differentials between WTI and other oils also 

expanded in the same time period. Specifically, price differentials between 

WTI and two other California crude oils, Thums and Line 63, as well as 

price differentials between WTI and other non-California heavy crude oils, 

such as Mexican Maya and Arab Heavy, also increased. The price 

differentials have since fallen somewhat but remain relatively high by 

historical standards, while world crude oil prices and the price of crude oil 

in general have risen further. Figure 1 shows historic prices of WTI and 

Kern River, as well as the price differentials between these two crude oils. 
Page 4 GAO-07-315 Crude Oil Differentials

Figure 1: WTI and Kern River Crude Oil Prices and Price Differentials, December 1987 to August 2006

0

5

10

15

Month and year

Month and year

0

10

20

30

40

50

60

70

80

U.S. dollars

Crude oil price

Aug.

2006

Jan.

2005

Jan.

2006

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

Dec.

1987

Aug.

2006

Jan.

2005

Jan.

2006

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

Dec.

1987

U.S. dollars

WTI Kern River

Source: GAO analysis of Platts data.

WTI-Kern price differential
Page 5 GAO-07-315 Crude Oil Differentials

The 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. This increase in supply helped depress prices for 

crude oils of similar quality, such as California’s crude oils, and contributed 

to the expanding price differential between California crude oils and WTI. 

In addition, EIA officials told us that the recent increases in global crude oil 

prices caused prices of light petroleum products, such as gasoline and 

diesel, to increase more than the prices of heavier products, such as 

residual fuel oil, because these heavier products compete against other 

fuels, such as coal, that are not immediately affected by rising oil prices. As 

a result, prices for light crude oils, which produce greater amounts of 

lighter, higher value products, increase faster than heavy crude oils, which 

produce greater amounts of heavier, lower value products, and thus the 

price differential widens. Third, events that 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 crude oil supply, 

primarily in that region. Some experts believe that 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 

other crude oils, including those from California. Finally, the state of 

California has alleged in the past that some crude oil producers in 

California manipulated prices of their crude oil to reduce their royalty 

payments, which would, in turn, cause crude oil price differentials between 

WTI and California crude oils to rise. Most officials and experts we 

interviewed did not believe that this type of price manipulation was a factor 

in explaining recent changes in price differentials. However, we cannot 

completely rule out this possibility or other possible factors that we could 

not observe that could explain some of these recent changes. 

Background Two-thirds of all crude oil consumed in the United States is used by the 

transportation sector, with gasoline accounting for two-thirds of that total. 

The second largest consumer of crude oil is the industrial sector, including 

refineries and petrochemical industries, which account for another 25 

percent of that total. In the residential and commercial sectors, crude oil 

consumption was as high as 15 percent of that total in 1970 but had since 

fallen to 6.5 percent in 2004. Similarly, the burning of crude oil to generate 

electricity peaked in 1975 at 8.6 percent, declining to 2.5 percent in 2004. 
Page 6 GAO-07-315 Crude Oil Differentials

Crude oil is supplied through onshore and offshore domestic production 

and international imports. In 2005, the United States produced 6.8 million 

barrels per day (bpd), a 5.5 percent decrease from 2004. California is 

currently the fourth largest oil producer (including onshore and offshore 

production) in the United States, behind Louisiana, Texas, and Alaska, 

respectively, but its production has declined at a rate of 2.4 percent per 

year for the past 10 years. California produced 731,150 bpd in 2004 (the 

most recent year for which numbers are available). Figure 2 shows the 

decline in California crude oil production and the quantity of various 

grades of crude oil produced in California.

Figure 2: Quantities of Crude Oil Grades Produced in California, 1987 to 2005

0

50

100

150

200

250

300

350

400

450

Barrels (in millions)

Year

Offshore intermediate

Offshore heavy

Onshore light

Onshore intermediate

Onshore heavy

Sources: CEC, California Department of Conservation, MMS.

19

2005

88

1989

1990

19911992

1993

1994

1995

1996

1997

1998

19

19992000

2001

2002

2003

2004

87
Page 7 GAO-07-315 Crude Oil Differentials

In 2005, the United States imported 13.5 million bpd, or 27.1 percent of total 

global oil imports. The EIA estimates that California imported 40.7 percent 

of all crude processed by the state’s refineries, with the bulk of imports 

coming from Saudi Arabia, Ecuador, Iraq, and Mexico. The remainder of 

California’s crude oil was either produced in state, or transported by tanker 

from Alaska. Figure 3 shows the sources of California’s crude oil and the 

state’s major refining centers as of 2005, the last full year of data available, 

and figure 4 shows the trend of California’s crude oil supply over the past 

two decades. 
Page 8 GAO-07-315 Crude Oil Differentials

Figure 3: Sources of California Crude Oil and Major Refining Centers, 2005

Los Angeles area

California

San Francisco Bay area

Other, 29%

Foreign import 

breakdown

Saudi Arabia, 34%

Equador, 25%

Iraq, 12%

Foreign oil (42%)

Alaskan oil (21%)

Indicates an area in which there is a heavier concentration of oil refineries

Sources: GAO, CEC, and EIA; California map, Map Resources. Images © Corel Corp. All rights reserved.

California produces 37% of the oil for these 

refineries and then relies on foreign oil imports

(42%) and oil transported from Alaska (21%) to 

finish the total workload. 

California production (37%)
Page 9 GAO-07-315 Crude Oil Differentials

Figure 4: Quantities and Sources of Crude Oil Consumed in California, 1987 to 2005

WTI crude oil is a widely traded oil that is commonly used as a benchmark 

for measuring crude oil prices in the United States. Prices for WTI are 

collected at Cushing, Oklahoma. Crude oils delivered by pipeline generally 

use WTI first month delivery (WTI crude oil delivered 1 month from a 

specific date) as a price benchmark, and crude oils delivered by tankers 

use WTI second month delivery (WTI crude oil delivered 2 months from a 

specific date) as a price benchmark.1

Barrels (in millions)

Year

Foreign

California

Alaska

Source: CEC.

0

100

200

300

400

500

600

700

800

199

1999

2000

2001

2002

2003

2004

2005

8

19

1990

1991

1992

1993

1994

1995

1996

1997

89

1988

1987

1

Crude oil is primarily transported using oil tankers and pipelines, with tankers generally 

providing intercontinental transport and pipelines used for transcontinental transport.
Page 10 GAO-07-315 Crude Oil Differentials

Crude oils are commonly classified by their density and sulfur content. The 

gravity of a crude oil is specified using the American Petroleum Institute 

(API) gravity standard, which measures the weight of crude oil in relation 

to water, which has an API gravity of 10 degrees. As shown in table 1, crude 

oil is generally classified as heavy (API gravity of 18 degrees or less), 

intermediate (API gravity greater than 18 and less than 36 degrees), and 

light (API gravity of 36 degrees or greater). In addition, crude oils vary by 

their sulfur content—crude oil is classified as sweet when its sulfur content 

is .5 percent or less by weight, and sour when its sulfur content is greater 

than 1 percent. Other natural characteristics, such as the presence of heavy 

metals and level of acidity, are also taken into account when classifying 

crude oils. In general, heavier and more sour crude oils require more 

complex and expensive refineries to process the oil into usable products 

but are less expensive to purchase than light sweet crude oils. Based on the 

API’s classification, California crude oils are almost all in the heavy and 

intermediate range. WTI, on the other hand, is a very light oil with an API 

gravity of just under 40. Table 1 shows the API classification and the API 

gravity of California’s three primary crude oils. 

Table 1: API Crude Quality Classes and Representative California Crude Oils

Sources: API, CEC, Platts.

Crude type API gravity

Percentage of Calif. 

crude oils, 2005

Representative 

Calif. crude oils 

with API gravity 

in parentheses

Heavy 18 degrees or less 51% Thums (17)

Kern (13.4)

Intermediate >18 degrees; 

<36 degrees

48.8% Line 63 (29)

Light 36 degrees or greater 0.2%

Sulfur type Description

Sweet .5% or less by weight

Sour greater than 1% by weight
Page 11 GAO-07-315 Crude Oil Differentials

The sale of crude oil primarily occurs through one of three types of 

transactions: a spot transaction, a contract arrangement, or as a futures 

contract. Spot transactions are agreements to sell or buy one shipment of 

oil at a price agreed upon at the time of the arrangement. Spot transaction 

prices in various regional markets are available through private publishers 

that monitor and record market transactions and prices. Oil is often traded 

in long-term contracts at prices that are tied to a market indicator, such as 

the spot market or the futures market. While most contract prices are set in 

reference to a market index or a benchmark crude oil, some domestically 

produced crude oils are also sold using posted prices, which are usually set 

by buyers, refiners, and gatherers, and apply to a particular crude stream (a 

crude oil or blend of oils of standardized quality). International crude oils 

sold through contract arrangements are generally priced using a formula 

that includes a base price, which is referenced to a market indicator, plus 

or minus a quality adjustment. A futures contract is a standardized 

agreement that obligates the holder of the contract to make or accept 

delivery of a specified quantity and quality of a crude oil during a specific 

month at an agreed upon price. Futures contracts are bought and sold on a 

commodities exchange, such as the New York Mercantile Exchange 

(NYMEX). However, unlike spot transactions and contract arrangements, 

futures contracts very rarely result in the delivery of physical barrels of oil. 

Instead, the contract may be satisfied by a cash settlement prior to contract 

expiration by selling or purchasing other contracts with terms that offset 

the original contract or by exchanging a futures contract for the 

commodity.2

2

Commercial interests typically use futures to hedge (or offset) unwanted price risk by 

shifting the risk to investors who hope to profit from taking on that risk. By hedging the risk, 

commercial interests seek price certainty, aiming to avoid losses due to falling prices, but at 

the same time willing to forgo the opportunity to make large profits from an unexpected rise 

in prices. A speculator may profit by accurately predicting either a rise or fall in prices. 
Page 12 GAO-07-315 Crude Oil Differentials

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).3

 Large price differentials also occurred in 2004, 2005, and 2006 for 

heavier crude oils imported into California, such as Maya and Arab Heavy. 

Since January 2005, the price differentials between WTI and these heavier 

California and imported crude oils have fallen somewhat from their peak in 

2005 but remain large by historical standards.

During the period from December 1987 through August 2006, all crude oil 

prices we evaluated tended to follow similar patterns, rising and falling in 

concert. However, the rate of increase or decrease in prices often varied by 

crude oil type and, consequently, the price differentials between these 

crude oils fluctuated. For example, California crude oil prices rose and fell 

in relation to WTI during the same period, with the higher quality Line 63 

mirroring the price of WTI more closely than the lower grade Kern River 

and Thums. Specifically, the price differential between WTI and Kern River 

ranged from a low of $3.20 in July 1995 to a high of $14.99 in January 2005. 

Similar variable changes also occurred for the WTI-Thums price 

differential, which fluctuated between a low of $2.47 in June 1995 and a 

high of $13.92 in February 2005. For Line 63, the price differential was 

lowest in September 2000 at $0.84 and highest in January 2005 at $9.57. 

Fluctuations in prices for WTI, Kern River, Thums, and Line 63, as well as 

price differentials between WTI and the three California crude oils can be 

seen in figure 5.

3

Kern River is a heavy crude oil with an API gravity of 13 degrees and a sulfur content of 1.1 

percent. Thums is also a heavy crude oil with an API gravity of 17 degrees and a sulfur 

content of 1.5 percent. Line 63 is an intermediate crude oil with an API gravity of 28 degrees 

and a sulfur content of 1.02 percent. WTI is a light crude oil with an API gravity typically 

between 38 to 40 degrees and a sulfur content of approximately 0.3 percent.
Page 13 GAO-07-315 Crude Oil Differentials

Figure 5: WTI, Kern River, Thums, and Line 63 Crude Oil Prices and Price Differentials, December 1987 to August 2006

Month and year

Month and year

U.S. dollars

Crude oil price

U.S. dollars

WTI-Kern WTI-Thums WTI-Line 63

WTI Kern River Thums Line 63

Source: GAO analysis of Platts data.

Price differentials

0

10

20

30

40

50

60

70

80

Aug.

2006

Jan.

2005

Jan.

2006

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

Dec.

1987

Aug.

2006

Jan.

2005

Jan.

2006

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

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Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

Dec.

1987

0

2

4

6

8

10

12

14

16
Page 14 GAO-07-315 Crude Oil Differentials

While numerous fluctuations in crude oil prices and crude oil price 

differentials have occurred over the 20-year period, global crude oil prices 

rose precipitously in mid-2004, with the price of WTI rising from $40.79 in 

July 2004 to $75.83 in August 2006––an increase of about 86 percent. This 

general rise in oil prices also occurred in California crudes, where prices 

for Line 63 rose from $41.44 in August 2004 to $70.72 in August 2006––an 

increase of about 71 percent, followed by Kern River and Thums, which 

rose from $40.45 and $41.41, respectively, in October 2004, to $63.32 and 

$65.02, respectively, in August 2006 ––both increases of about 57 percent. 

Because WTI rose faster than California crude oils, price differentials 

between California crude oils and WTI also increased during this period. 

The price differential for Line 63 rose from $6.54 in September 2004 to a 

peak of $9.61 in December 2004––an increase of about 47 percent. The 

price differential between Kern River and WTI rose from $5.95 in June 2004 

to a peak of $14.99 in January 2005––an increase of about 152 percent. The 

price differential for Thums and WTI followed a similar pattern, rising from 

$7.13 in August 2004 to a peak of $13.92 in February 2005––an increase of 

about 95 percent. 

Crude oils imported into California, including Arab Heavy and Maya, 

followed a similar pattern of fluctuating prices and increasing price 

differentials during the same recent period. These intermediate crude oils 

compete with Kern and Thums in the California marketplace because of 

their similar quality and characteristics.4

 Price differentials between WTI 

and Arab Heavy increased from $7.84 in June 2004 to a high of $16.24 in 

January 2005––an increase of about 107 percent. Price differentials for 

Maya and WTI were $8.39 in June 2004 and rose to a peak of $18.68 in 

March 2005––an increase of about 123 percent. Figure 6 provides an 

overview of the rise in prices for WTI, Arab Heavy, and Maya and price 

differentials between WTI and these imported crude oils from July 1988 to 

August 2006.

4

Arab Heavy is produced in Saudi Arabia with a gravity of 27 degrees, and Maya is produced 

in Mexico with an API gravity of 22 degrees and a sulfur content of 3.3 percent.
Page 15 GAO-07-315 Crude Oil Differentials

Figure 6: WTI, Maya, and Arab Heavy Crude Oil Prices and Price Differentials, July 1988 to August 2006

Month and year

Month and year

U.S. dollars

Crude oil price

U.S. dollars

WTI-Maya WTI-Arab Heavy

WTI Maya Arab Heavy

Source: GAO analysis of Platts data.

Price differentials

0

10

20

30

40

50

60

70

80

0

2

4

6

8

10

12

14

16

18

20

Aug.

2006

Jan.

2006

Jan.

2005

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

July

1988

Aug.

2006

Jan.

2006

Jan.

2005

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

July

1988
Page 16 GAO-07-315 Crude Oil Differentials

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. For example, the price differential for Kern River fell 

to $12.17 in August 2006 (the last month for which data was available), a 

decrease of about 19 percent from its high of $14.99 in January 2005. For 

the lighter California crude oil, Line 63, the price differential fell to $5.11 in 

August 2006, a decrease of about 47 percent from a peak of $9.61 in 

December 2004. The price differentials for Arab Heavy and Maya followed 

similar patterns. For example, the WTI-Arab Heavy price differential fell to 

$12.56 in August 2006, a decrease of about 23 percent from its high of 

$16.24 in January 2005. Nonetheless, all the crude oil price differentials 

between WTI and the heavier crude oils we evaluated remain high by 

historical standards.

Recent Increases in 

California Crude Oil 

Price Differentials Are 

Consistent with Other 

Market-Based Factors 

According to EIA officials and other crude oil market experts we 

interviewed, a range of market-based factors have affected recent crude oil 

price differentials. First, changing conditions and events in the global 

crude oil market influenced the relative prices of light and heavy crude oils, 

causing crude oil differentials between WTI and heavier crude oils to 

increase. Second, local and regional events that impacted specific regional 

crude oil markets affected crude oil prices and affected the price 

differential with WTI. This was particularly evident in oil production in the 

Rocky Mountain region in early 2006 when an increase in crude oil supplies 

and a lack of crude oil transportation capacity caused a decrease in prices 

and an increase in the price differential. In addition, the state of California 

has alleged in the past that crude oil producers in California manipulated 

prices lower to avoid making royalty payments. While most of the officials 

and experts we interviewed did not believe that California crude oil 

producers have recently engaged in this type of price manipulation, we 

cannot rule out this possibility or other possible factors that we could not 

observe that could explain some of the changes in price differentials. 

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 
Page 17 GAO-07-315 Crude Oil Differentials

differential in comparison to heavy crude oil, such as those oils typically 

produced in California. Conversely, an increase in the supply of heavy 

crude oil can result in lower prices for those crude oils, thus increasing the 

price differential between heavy crude oils and WTI. For example, 

according to EIA officials, between January 2003 and January 2005, world 

demand for crude oil increased substantially, in China and the United 

States in particular and in response, crude oil producers in the Middle East 

increased their production of heavy crude oil to meet the rising overall 

demand for crude oils. 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. EIA officials also told us that when crude oil 

prices increase, as they have in recent years, prices of lighter petroleum 

products, such as gasoline and diesel, rise faster than prices of residual fuel 

oils and other heavier crude oils because the latter products face greater 

competition from coal and natural gas, which are not initially affected by 

increases in crude oil prices. Because heavier crude oils typically generate 

a greater proportion of heavier petroleum products than do lighter crude 

oils, the value of the heavier crude oils falls relative to lighter crude oils. 

This causes the price differentials between WTI and heavier oils to rise 

further. Both of these factors helped push the price of heavy crude oils 

lower in relation to light crude oils. Specifically, between January 2003 and 

January 2005, the price of WTI increased by about 42 percent, while the 

price of Kern increased by about 16 percent. 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. Consequently, these events can 

increase or decrease price differentials. These events are tracked by 

analysts in the private sector crude oil markets, financial markets, and the 

federal government. From 1970 through the end of 2005, EIA examined 72 

different events and their effects on crude oil prices, such as the 

Organization of Petroleum Exporting Countries oil embargo in 1973, the 

terrorist attacks of September 11, 2001, and the multiple hurricanes that 

struck the U.S. Gulf Coast in 2004 and 2005. For example, when Hurricane 

Ivan hit the Gulf of Mexico region in September 2004, oil tankers importing 

crude oil into the Gulf were delayed, and oil producers were forced to 

evacuate 3,000 employees from the region. MMS estimated that Hurricane 

Ivan caused crude oil production to decrease by 61 percent and resulted in 
Page 18 GAO-07-315 Crude Oil Differentials

spikes in the price of WTI. This would have increased the price differential 

between WTI and other crude oils, including those California crude oils we 

evaluated. 

In addition, in early 2006, the price differential of local crude oils in the 

Rocky Mountain region rose to an unusual extent. The increase was most 

pronounced with the price differential between WTI and Wyoming Sweet, a 

regionally produced crude oil with a gravity and sulfur content very similar 

to WTI. From 1988 through mid-2005, the price of Wyoming Sweet was 

roughly equal to WTI, with price differentials ranging between zero and $3.

However, beginning in January 2006, the price of Wyoming Sweet dropped 

suddenly. Consequently, the price differential between Wyoming Sweet and 

WTI increased from about $2 in the beginning of 2004 to over $24 in 

February 2006. In contrast to California, where crude oil prices and price 

differentials to WTI have experienced regular fluctuations, there was no 

historic precedent for crude oil price differentials of this magnitude 

occurring in the Rocky Mountain region. Although the Wyoming Sweet 

price differential has since fallen to less than $10, this is still unusually high 

for this region. Figure 7 shows prices for WTI and Wyoming Sweet and their 

price differential between December 1987 and August 2006. 
Page 19 GAO-07-315 Crude Oil Differentials

Figure 7: Wyoming Sweet and WTI Crude Oil Prices and Crude Price Differentials, December 1987 to August 2006 

Month and year

Month and year

0

10

20

30

40

50

60

70

80

U.S. dollars

Crude oil price

Aug.

2006

Jan.

2005

Jan.

2006

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

Dec.

1987

Aug.

2006

Jan.

2005

Jan.

2006

Jan.

2004

Jan.

2003

Jan.

2002

Jan.

2001

Jan.

2000

Jan.

1999

Jan.

1998

Jan.

1997

Jan.

1996

Jan.

1995

Jan.

1994

Jan.

1993

Jan.

1992

Jan.

1991

Jan.

1990

Jan.

1989

Dec.

1987

U.S. dollars

Wyoming Sweet WTI first

Source: GAO analysis of Platts data.

WTI-Wyoming price differential

0

5

-5

10

15

20

25

30
Page 20 GAO-07-315 Crude Oil Differentials

State officials and officials representing crude oil producers in the region 

told us that the principal cause of the expanding Wyoming Sweet price 

differential was inadequate crude oil transportation infrastructure. In 2005, 

crude oil production in this region increased, and Canadian producers also 

increased imports into the region. However, the existing pipeline, railroad, 

and trucking infrastructure for transporting crude oil was insufficient to 

move this large influx of crude oil out of the Rocky Mountain region to 

other markets where it could have received a higher price. 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. State officials we interviewed 

predicted that, until transportation infrastructure can be expanded, price 

differentials for oils produced in the Rocky Mountain region will continue 

to be above the historical trends. 

Manipulation of Crude Oil 

Prices Could Affect Price 

Differentials

Market manipulation is a final factor that could cause crude oil price 

differentials to increase. 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. While we did not find any 

evidence that any market players had manipulated crude oil prices in 

California or elsewhere during the recent period of increasing crude oil 

price differentials, we cannot rule out this or other possible factors or 

events that we could not observe that could explain some of the changes in 

price differentials.

The sales price of crude oil is an important variable in the equation that 

determines the amount of royalties paid by oil companies who produce 

crude oil on federal lands. Royalty revenues are calculated using the 

following formula:

Volume of Crude Oil Sold X Sales Price X Royalty Rate = Royalty 

Revenues

Consequently, changes in either the sale prices or the volume sold can 

greatly affect the total amount of royalties oil companies pay and the states 

receive. Historically, posted prices were widely accepted as the true 

market value and the measure that should be used in determining royalty 

payments by crude oil producers, refiners, state governments, and the 

federal government. 
Page 21 GAO-07-315 Crude Oil Differentials

In litigation starting in 1975 and continuing through 1995, the state of 

California and the city of Long Beach alleged that seven major oil 

producing companies had conspired to keep posted prices low and that 

their posted prices did not reflect the true market value of their crude oil, 

thus illegally reducing the amount of royalties the oil companies paid. Six 

of the companies eventually settled their cases, while the seventh went to 

trial and was exonerated. Although MMS was not a party to this litigation, it 

continued to independently evaluate whether posted prices reflected 

market value. In June 1994, MMS formed an interagency task force with 

some of the agencies that had previously reviewed the issue, including the 

Departments of Energy, Justice, and Commerce, to evaluate documents 

from the litigation and other data and determine whether the companies 

had wrongfully undervalued crude oil to avoid paying royalties. In May 

1996, the task force concluded, among other things, that (1) oil companies 

in California typically received proceeds higher than posted prices and, 

therefore, royalties were underpaid and (2) much of the crude oil produced 

in California was not sold as contemplated in the royalty revenue formula, 

but rather moved through various transfers or exchanges either within a 

company that owned both the production and refinery operations, or 

between two companies for purposes of reducing transportation costs.

Consequently, the reported sale price was frequently lower than actual 

market prices. 

In March 2000, MMS changed its regulations for valuing crude oil from 

federal lands to address the conclusions of the task force. Among other 

things, the regulations changed for determining the value of crude oil sold 

in a “non-arms length” transaction––crude oil transferred within an oil 

company between its production and refining affiliates. Currently, royalties 

for these non-arms length transactions are calculated using a sales price 

that is imputed based on the price of Alaska North Slope (in California) or 

NYMEX (for the rest of the country) and adjusted for differences in quality. 

In arms-length transactions––sales between two separate and unaffiliated 

companies––the actual sale price, and not the posted price, is used to 

calculate royalties. 

In the course of our work, most of the officials and experts we interviewed 

thought the new MMS regulations were effective in addressing this problem 

and neither believed that crude oil producers were engaging in this sort of 

price manipulation during the recent period of increasing crude oil price 

differentials, nor did they provide any evidence of such manipulation. 

However, we cannot rule out this or other possible factors or events that 
Page 22 GAO-07-315 Crude Oil Differentials

we could not observe that could explain some of the changes in price 

differentials. 

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to interested congressional 

committees and Members of Congress, the Secretary of Energy, and the 

California State Controllers Office. We also will make copies available to 

others upon request. In addition, the report will be available at no charge 

on the GAO Web site at www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

at (202) 512-3841 or wellsj@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made key contributions to this report are 

listed in appendix II.

Jim Wells 

Director, Natural Resources and Environment
Page 23 GAO-07-315 Crude Oil Differentials

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

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. As part of the second 

objective, in order to provide additional context to the issue of price 

differentials in California, we also evaluated the unusually high crude oil 

price differentials that occurred in the Rocky Mountain region in late 2005.

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). We also obtained price data for two heavy 

crude oils that are imported into California in large volumes: Arab Heavy, a 

Saudi Arabian crude oil, and Maya, a crude oil imported from Mexico. 

These data included prices from December 1987 through August 2006. 

While most of the data we obtained listed a monthly average price, some 

crude streams used daily or weekly averages. In these instances, we 

calculated the monthly average price in order to make appropriate 

comparisons. We used this data to calculate price differentials by 

subtracting the price for the subject crude oil from the price of the 

benchmark crude oil and analyzing these differentials for trends over time. 

We interviewed officials from the Energy Information Administration 

(EIA), Minerals Management Service (MMS), and the California Energy 

Commission (CEC) to get background information on the major crude oils 

produced in California and imported into the region.

To identify factors that may explain the recent changes in the California 

price differentials, we (1) interviewed key officials and experts, (2) 

reviewed studies on crude oil prices and price differentials, and (3) 

reviewed historical studies and interviewed agency officials about the 

history of crude oil price manipulation in California. To better understand 

the key factors that affect crude oil price differentials in general and 

specifically in California, we interviewed federal agency officials from EIA 

and MMS; state agency officials from CEC and the California State 

Controller’s Office; and experts from organizations representing crude oil 

producers and refiners, including the California Independent Petroleum 

Association (CIPA), the Western States Petroleum Association (WSPA), and 

the Independent Petroleum Association of America. We reviewed studies, 

reports, and presentations on crude oil pricing and differentials written by 

or produced for EIA, MMS, CEC, CIPA, and WSPA. We also reviewed a 

study prepared for the California State Controller’s Office on crude oil price 
Appendix I

Objectives, Scope, and Methodology

Page 24 GAO-07-315 Crude Oil Differentials

differentials in California, written by IIC Inc., and interviewed its author. To 

evaluate the issue of crude oil price manipulation in California, we 

reviewed documents, regulations, and studies from the 1980s and 1990s 

regarding the history of allegations of oil producers manipulating prices to 

avoid making royalty payments. We also interviewed officials with the 

California State Controller’s Office, MMS, CIPA, and WSPA, regarding the 

history of manipulation in California, and whether they believed or had 

evidence that such price manipulation might have occurred in the recent 

period of unusually high price differentials. We did not seek to acquire 

proprietary records on the prices received for sales of crude oil from crude 

oil producers or their buyers for this engagement. 

To evaluate the unusually high price differentials in the Rocky Mountain 

region, we obtained data on the spot price of Wyoming Sweet, a light sweet 

crude oil similar in quality to WTI. We used this data to calculate price 

differentials by subtracting the monthly average price for Wyoming Sweet 

from the monthly average price of the WTI and analyzed these differentials 

for trends over time. To understand the causes of the high price differential 

in the Rocky Mountain region and to learn what stakeholders in the region 

are doing to address the issue, we interviewed officials with the Wyoming 

Pipeline Authority, the North Dakota Petroleum Council, the Interstate Oil 

and Gas Commission, the Colorado Oil and Gas Commission, and oil 

producers and refiners in the region.

We conducted our work between May and December 2006 in accordance 

with generally accepted government auditing standards. 
Page 25 GAO-07-315 Crude Oil Differentials

Appendix II

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact Jim Wells, (202) 512-3841, or wellsj@gao.gov

Staff 

Acknowledgments

In addition to the individual listed above, Frank Rusco, Assistant Director; 

Jeffrey Barron; Casey Brown; Alison O’Neill; Kim Raheb; Barbara 

Timmerman; and Wilda Wong made key contributions to this report.

(360701)
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