Will Gavin Newsom-backed legislation lower California gas prices? Experts are skeptical

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Gov. Gavin Newsom boasts that thanks to legislation he signed this week, “We now have the ability to address those price spikes” in gasoline.

“This was a profound and consequential effort to reduce the costs of working people in the state of California,” he said..

Newsom did not pledge instant changes. “I don’t want to overstate. I don’t want to overpromise,” he said of the bill’s impact.

The meaning of all this for consumers saddled with the nation’s highest gasoline prices: Don’t start counting your savings.

In fact, said independent analysts, Newsom’s new bid to stop price spikes could actually send costs up.

“In the short run any investment costs to increase storage may actually raise gas prices should those be passed on to the consumer. Oil trades globally and any attempts to fix prices locally may not work,” said Sanjay Varshney, professor of finance at Sacramento State.

Figuring out how and why gasoline prices go up and down is complicated, and generally well beyond any political leader’s control.

Newsom Monday signed legislation to require oil companies to give the state more authority to oversee refinery operations. That could mean companies could have to keep minimum amounts of refined gasoline on hand, which in theory should prevent or ease sudden price increases.

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Newsom made it clear who he blames for price increases. “You have been screwed by these companies,” he said Monday of Big Oil. “It’s not complicated..”

The legislation will help in one sense, said Gokce Soydemir, a professor of business economics at California State University, Stanislaus.

He said such a policy “might help stabilize oil and prevent spikes,” but at the same, he said, the plan may not be effective in reducing oil prices.

And, said Patrick De Haan, head of petroleum analysis at GasBuddy, “There could be collateral damage. If oil companies have to maintain higher levels (of product), they may have to build new tanks and new infrastructure and rotate through that.”

That would mean new costs, costs likely to be passed on to consumers, De Haan said.

California has long had the nation’s highest gasoline prices. The average cost of a gallon of regular gasoline Tuesday was $4.68, according to AAA, the nation’s highest. The national average was $3.20.

Why gasoline prices go up and down

There are a host of reasons for prices changes. Among them:

▪ International politics. “As long as regional conflicts continue, the price of oil will remain high and continue to spike at times when the conflicts escalate,” Soydemir said.

California prices peaked at $6.44 a gallon in June 2022, five months after Russia invaded Ukraine and oil markets, concerned about tightening supplies, reacted.

▪ OPEC+. Last year 76% of the United States oil supply came from international sources, which means the world’s biggest petroleum producers still have a big say in pricing.

Those nations have been cutting production, and recently agreed to continue the cuts through next year as demand remains sluggish

▪ Other costs. While the cost of crude oil generally has accounted for 54% to 57% of the cost of a gallon of gasoline in the first eight months of this year, the rest of the price factors in refining, taxes and marketing, according to the federal Energy Information Administration.

And, as Jeff Lenard, vice president for strategic energy initiatives at the National Association of Convenience Stores, noted, “Not every dollar of the cost of crude goes to profit, of course. There are costs with pulling oil, and it varies by location.”

▪ Taxes. California’s state and local taxes and fees on gasoline are the nation’s highest, 69.8 cents a gallon.

Nationally, EIA estimated that in July, taxes nationally accounted for 15% of the price of a gallon of gasoline

▪ Environmental regulation. California has stringent environmental standards. It requires refiners to produce a different blend of gasoline in the summer to help meet those standards. That blend is more expensive to produce.

California’s refineries, though, are a potentially useful target for Newsom’s effort to stabilize prices.

It’s more difficult for California to make up refinery shortages from interstate pipelines because of its location.

“Refineries in the state often operate at or near maximum capacity because of the high demand for those petroleum products and the lack of interstate pipelines that can deliver those cleaner fuels into the state,” explained EIA in a May analysis.

The lack of product from the interstate pipelines, it said, “means replacement supplies of (California gasoline) come in by marine tanker from out-of-state U.S. refineries or from other countries. It can take several weeks to find and bring replacement motor gasoline from overseas that meets California’s unique specifications.”