California’s gas prices are higher than those in other states due to supply-and-demand issues – including government actions that limit the supply – and the highest regulatory costs and gas taxes in the United States, witnesses testified November 29 during a five-hour hearing of the California Energy Commission.

The commission, whose five members are appointed by the governor, called the no-vote information-gathering hearing to discuss increases in gas prices that occurred earlier this year, as well as the status of California refinery operations and the reported profits of oil industry companies. The commissioners were joined on the dais by state Senator Monique Limon, a Santa Barbara County Democrat.

“Today’s California Energy Commission hearing made it crystal clear that California’s high gas prices are a result of California’s highest-in-the-nation gas tax, cap-and-trade auctions, regulatory costs, requirements for a state-specific fuel blend, high demand, and restrictions on supply,” CalTax President Robert Gutierrez said after listening to the testimony. “Next week, the Legislature will return to Sacramento and be called into special session to address high gas prices. California cannot tax its way out of this problem, as some have suggested. A windfall profits tax doesn’t lower gas prices – it makes every trip to the grocery store, soccer practice, and grandma’s house more expensive.”

California gas prices have surpassed the national average in 2022, with prices reaching as high as $6.43 per gallon in early October, according to the American Automobile Association. Newsom has repeatedly claimed that the price difference is due to “price-gouging” by oil companies.

Newsom also noted this week that prices fell shortly after his administration authorized refineries to switch to the state’s easier-to-produce “winter blend” ahead of the usual annual schedule – an indication that an increase in the supply of gasoline led to lower prices.

California’s major oil companies were represented at the hearing by the industry’s trade association, the Western States Petroleum Association (WSPA).

Individual oil companies chose not to participate in the hearing, noting that speaking publicly about their operations, maintenance, and inventory levels would violate strict state and federal antitrust laws. The companies previously provided the governor with letters describing the many factors that go into the price of gas.

Paul Davis, senior vice president of supply, trading, and optimization for PBF Energy, said his company “formally met with members of the governor’s senior staff twice in [the first financial quarter of 2022] to discuss our concerns about potential near-term gasoline supply shortages and spoke with them after that several other times.”

Commission staff provided information on historical gas price spikes and the status of California’s gasoline market.

CA Gas Market More Expensive

A PowerPoint slide from the California Energy Commission’s staff presentation explaining why gas is more expensive in California than in other states.

Gordon Schremp, the commission’s senior fuels specialist, provided a presentation on California’s fuel price trends and market factors that historically cause gas prices in the state to be higher than the rest of the United States.

Schremp noted that California’s market is isolated – by time, distance, and pipeline capacity – from the remaining contiguous United States. This isolation leads to California being largely self-sufficient in its supply of gasoline and diesel fuel, and imports of gasoline account for only 3 percent to 7 percent of the total state supply.

The self-sufficiency in oil refining makes California more susceptible to price spikes when unplanned outages or maintenance occur in any of the state’s 11 oil refineries, Schremp noted.

Schremp concluded that California’s higher-than-usual gasoline prices could be attributed to lower-than-usual fuel imports, reduced refining capacity, unplanned refinery outages, the state’s tax burden, environmental program costs, and market isolation in comparison with other states, among other things.

Ysbrand van der Werf, the commission’s fuels price specialist, attributed the 2022 price spike to several factors, including renewable diesel being more profitable to refine than petro-diesel due to the availability of subsidies, production failing to meet demand, and imports becoming more expensive.

Quentin Gee, manager of the commission’s advanced electrification branch, provided an overview of California’s progress toward its goal of 100 percent zero-emission vehicles by 2035. Gee found that zero-emission vehicles comprise 17.7 percent of the state’s fleet, and California is on track to reach its existing goals by 2035. Additionally, the commission expects gasoline demand to decrease approximately 800 million gallons per year between 2032 and 2040.

After the remarks from commission staff, a panel of experts on gasoline pricing was convened, and the panelists provided contrasting opinions on what caused the 2022 price spike in California. Commissioners and Senator Limon questioned panelists about what caused price increases at a time when crude oil prices were dropping, and no new state taxes were enacted (although the state’s excise tax increased July 1, and the increase remains in effect).

Jamie Court, president of Consumer Watchdog, claimed that price increases could be explained by intentional market manipulation. Court alleged that refiners used maintenance as an excuse to raise gasoline prices and profit on spot-market trade.

Economists on the panel disagreed with Court’s assessment. Professor Severin Borenstein, from the Haas School of Business, said that what Court described as company taking advantage of spot-market trading is a commodity market that is present in every industry. Borenstein also noted that motorists can save considerably – at least 70 cents per gallon in the area near his house – by comparison shopping for gas, and he stated that when more people do so, it results in lower prices as competing gas stations seek to lure customers.

Panelists also said California’s supply of gas stations is too low to meet the demands of millions of motorists, but state regulations, taxes, business mandates, and slow processing of permits make it more difficult to open a new station in California than in other states, so businesses decide to expand elsewhere.

Additionally, California’s decision to set a date for banning gas-burning vehicles discourages people from opening gas stations.

“It is the policy of this state to run this industry out of business,” David Hackett, chairman of Stillwater Associates, said, citing the ban.

WSPA President Catherine Reheis-Boyd said factors impacting gasoline prices include international market conditions, state regulations, and refining capacity. Reheis-Boyd urged lawmakers to address gas prices by changing state policies that have a negative impact on the affordability of energy, and said a windfall profits tax would only make the problem worse.

Borenstein agreed that a windfall profits tax would not lower prices at the pump.

A report released by WSPA last week details the economic effects of a “windfall profits” tax and concludes that the tax would be harmful for California motorists.

The report, prepared by the respected Capitol Matrix Consulting firm, begins by highlighting erroneous claims made in a September press release issued by the Governor’s Office. The release cites statements made by Consumer Watchdog, and the WSPA report noted that Consumer Watchdog mislabeled “gross refinery margins as profits when discussing the financial performance of California refineries … [resulting] in a major overstatement of profits actually reported by California refiners.”

The profits of California refineries are similar to those of out-of-state refineries after factoring in the higher-than-average operating expenses that California refineries pay, the report found.

The higher operating costs are attributed to the high cost of electricity and natural gas in California and the state’s low-carbon fuel standard (LCFS) requiring specific blends that are costly to refine. Retail prices also are affected by additional costs “after the product leaves the refinery,” the report noted, including costs imposed on retailers for “land, construction, leases, labor, insurance, energy, maintenance, and upkeep.”

“California’s higher taxes on gasoline, its cap-and-trade and LCFS fees, and the above-average operating costs” account for “at least $0.92 per gallon of the difference between California and national average gasoline costs,” according to the report.

Wholesale prices of gasoline are set on “competitive global and regional markets,” so prices in California for wholesale fuel fluctuate based on supply and demand across markets.

The report lists four reasons why California experiences price spikes: the lack of crude oil or refined product pipelines into the state, high costs and strong resistance to rail shipments, constrained sea-going shipments from Gulf Coast due to the Jones Act (a federal law that restricts water transportation of cargo between U.S. ports to ships that are owned, crewed, registered, and built in the United States) and lack of qualifying vessels, and the lack of out-of-state refinery capacity for gasoline that meets California’s formulation standard.

The shrinking industry in California “has been driven by high regulatory costs,” such as reformulated gasoline standards, emissions controls that are costly, the state’s cap-and-trade allowance program and the low-carbon fuel standard, the report added.

Oil and gas profits in California were relatively even with those of the Gulf Coast and Mid-Continent regions in 2019, 2020, and 2021, the report found. Due to the “cyclical nature of oil industry profit,” a windfall profits tax would “punish California companies during high-profit years without regard to the losses that occur when oil markets turn downward,” the report added.

The federal government experimented with a windfall profits tax on oil in the 1980s, and the tax raised “less than expected revenues” and was repealed prior to the sunset date initially set by Congress. The report noted that “excess profits taxes … have failed to achieve policymakers’ objectives” in other areas, too, and the results in California would “likely be no better than those imposed by the U.S. government.”

The report suggested that a “better alternative to a windfall profits tax for addressing California’s high prices and shortages would be for the state to adopt regulatory policies conducive to increasing supplies of both crude and refined petroleum in the state.”