Are California’s high gas prices due to industry price gouging, or are they driven by high taxes and fees imposed by the state?
Both are likely true, experts told state lawmakers during the first two hearings of a special legislative session focused on the issue this week.
Gov. Gavin Newsom called the special session on Aug. 31 to have lawmakers consider a proposal to require refineries to have a minimum inventory of gasoline, which Newsom argues would stave off the painful supply-driven price spikes regularly seen at California’s gas stations.
The backdrop of the special session is yet another increase in California’s gas prices, the third year in a row of late-summer price jumps for the state’s drivers.
Average gas prices in the rest of the United States have dropped since late August. But the cost in Northern California has climbed more than 25 cents during the same period, prompting state market watchers to warn of a “significant spike.”
The state’s new Division of Petroleum Market Oversight estimates price spikes over the past two years cost Californians between $525 million and $2.1 billion.
“When these spikes happen, it triggers profits. It’s a true fact,” said Siva Gunda, vice chair of the California Energy Commission.
Neale Mahoney, a Stanford economics professor, said he had no “smoking gun evidence” of oil companies gaming the market, though he said the proposal on the table would likely prevent refiners from squeezing money from consumers.
Experts representing the oil industry strongly pushed back on the proposal, arguing it would add more regulations and costs to their business.
California’s complex gas market
Assembly members spent their first informational hearing getting a crash-course on California’s unique petroleum fuels market and how it affects pricing.
The gasoline pumped into Californians’ cars is almost exclusively refined in-state, with mostly imported crude oil. The at-home refining is due in large part to the state’s strict clean fuel standards, which require a blend that’s more expensive to produce than the gas used in other states, and therefore is not produced in other states.
Nine refineries, located mostly in the East San Francisco Bay and South Los Angeles, process 1.6 million barrels of crude per day for use in California or to export to states like Nevada or Arizona.
Once a more diverse industry with dozens of refineries of various sizes, California’s refining market has become consolidated and increasingly vulnerable to disruptions.
Just four refining companies control 90% of the supply in California. When refineries experience unexpected or extended maintenance, it often leads to price spikes.
The state is also planning a breakup with the oil industry over the next 20 years, with goals to reduce greenhouse gas emissions by 85% of 1990’s levels by 2045. But analysis by legislative staff acknowledges gasoline “demand, while declining, is not going away.”
So can lawmakers fix the sting of price spikes that regularly drive a gallon of gas to $5 or $6 – or higher?
“I don’t think you can,” Tom Robinson, chairman of the company that owns Rotten Robbie gas stations, told committee members. He echoed criticisms that California’s market is overregulated, telling lawmakers “all you can do is make it worse.”
Other experts, including an energy market analyst and Mahoney, the Stanford professor, discussed a “rocket and feather” phenomenon at the gas pump: Prices often spike quickly – or rocket up – when there’s a disruption. Prices float down slowly – like a feather – and can take weeks to return to normal levels.
Would a minimum inventory law help prevent price spikes?
Analysis of the proposal by the energy commission found that while it could mitigate short-term price spikes, it “could increase average prices for refiners to maintain additional storage.”
Tai Milder, head of the oil watchdog agency that was created as a result of the last gasoline-focused special session, argued it would be a fair trade.
“If we can eliminate the price spikes, the average cost will come down significantly,” he told lawmakers. “Because unfortunately, we’re experiencing price spikes just about every year.”
Other countries including Australia, Germany and Switzerland have similar requirements, Milder said.
“Californian’s economy is bigger than these other nations,” he said. “Having more of a supply is good for consumers and price spikes. It’s also good for business to have more stability and planning and resiliency for natural disasters.”
Oil industry representatives wrote the proposal off as another attempt by the state to insert itself into a complicated market.
“We fundamentally believe that we are being set up for failure,” said Eloy Garcia, a lobbyist of the Western States Petroleum Association, who accused lawmakers of “micromanaging.”
There was also some disagreement over whether the adequate storage already exists to satisfy the proposal. Milder and Gunda, both Newsom appointees, believe there is, but industry experts said many refiners would likely need to invest in additional storage to meet the state’s demands.
Some Democratic lawmakers signaled support for the proposal while others remained skeptical.
“I still don’t see how storage is addressing the lack of competition or the opaqueness” of the market, said Assemblymember Al Muratsuchi, D-Torrance, whose district includes three refineries.
The proposal lacked buy-in from some labor groups, including the Building Trades Council.
While the hearing was focused on the minimum inventory proposal, some lawmakers expressed interest in other possibilities including changing requirements for the state’s unique fuel blend.
What about a gas tax holiday?
Republican lawmakers introduced their own slate of bills to lower gas prices , including suspending the gas tax and providing a $100 rebate to drivers.
One proposal by Assemblymember Joe Patterson, R-Rocklin, would delay proposed changes to the state’s fuel standards in order to help the state align with its climate goals. The California Air Resources Board estimates the shift could increase the cost of regular fuel by 37 cents per gallon over the next year. Diesel could go up by 47 cents.
“The Legislature should consider a variety of proposals to bring prices down during this special session, not just rubberstamp the governor’s plan,” Patterson said in a statement. “My proposal represents a simple way to prevent even more pain at the pump.”
Newsom has repeatedly written off the idea of suspending the gas tax, arguing it would not guarantee the savings are passed onto consumers. His office cited a report that found most of the savings from a 2022 gas tax holiday in Florida “were pocketed by fuel companies.”
Special session drama
More than a dozen Assembly members sat through two days of informational hearings this week and have a first vote scheduled Sept. 26. The full Assembly plans to vote on the proposal Oct. 1.
But Senate leader Mike McGuire, D-Healdsburg, still has not committed to call his chamber back to vote in a special session – at least not until the Assembly acts.
McGuire’s office said in a statement that Senate Democrats are “united.”
“We appreciate the Assembly’s work on this critical issue and if they ultimately take action and have the votes to move reform forward, the Senate will be ready to convene, establish our process and act swiftly to provide the relief all Californians deserve.”
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