California Refiners’ Price Gouging: The Worst Whodunit Ever

Severin Borenstein, the UC Berkeley professor who has looked closely at what underlies California’s sky-high gas prices over the years, calls the gap between California’s gas prices and other states’ prices the “mystery surcharge.” Professor Borenstein’s analysis reveals California’s taxes and regulations account for only a fraction of that gap – which was nearly $3 a month ago according to a report cited by Governor Newsom – leaving the rest of it unexplained.

But as mystery storylines go, this is a pretty lousy one, that would never make it past Hollywood showrunners. We don’t have an array of suspects, we have one bad guy – California’s oil refiners – with means, motive, opportunity, and a giant pile of loot in their hideout.  The means is their collective domination of gasoline sales in California, with five refiners – Chevron, Marathon, PBF Energy, Phillips 66, and Valero – manufacturing 97% of the state’s gasoline. The motive is, well, as UN Secretary-General Antonio Guterres put it recently, the “grotesque greed” of oil and gas companies making record profits worldwide. The opportunity was this year’s volatile oil markets and inflation, both providing cover.  And the giant pile of loot is the staggering profits being raked in by the California refiners – as reported by Consumer Watchdog, 30 percent higher on the West Coast than anywhere else in the world in the third quarter of 2022.

Governor Newsom has been rightly lauded for cutting right through the whodunit and placing accountability where it belongs, calling for a price gouging penalty to be assessed on the California refiners at a special legislative session to be held in December.  Consumer Watchdog, as well as NRDC and a large coalition of environmental organizations, have all praised the Governor for doing the right thing. 

And the detective on the case as it were, the California Energy Commission (CEC), is not tolerating any nonsense from the suspects, either. The CEC gave the refiners a chance to provide sound reasons for the California price gap, which they effectively declined to give.  In response to CEC’s letter demanding an explanation, the refiners either went the “we’d tell you but then we’d have to kill you” route, referencing business confidentiality; or else gestured vaguely at an array of possible causes – refinery outages, crude oil supply disruptions, oil production regulations, cap and trade, the low carbon fuel standard, travel times for oil tankers, COVID, and what have you.  Perhaps they should have thrown in phases of the moon and vengeful demon fairies for good measure, because none of the purported causes they cite have withstood analytical scrutiny by Professor Borenstein, Consumer Watchdog, or CEC as a reason for the price gouging gap between California and other states.  

So as Governor Newsom releases more details about the price gouging penalty, lawmakers should very seriously consider it. And in doing so, they should bear in mind two factors, beyond the sheer outrageousness of oil company profiteering. 

First, it’s important to recognize that in a greening California economy, there is increasingly less of a place for oil refining. Refiners know this, and are taking steps to try to keep themselves afloat in a changing economy. Several are converting to bioenergy production. But others have dealt with declining West Coast product demand by stepping up their exports to other US states and overseas. And arguably, the price gouging we are witnessing is simply one more means by which refiners are trying to make their operations pencil out. We cannot let them. Oil refining happens overwhelmingly in disadvantaged communities, saddling primarily residents of color with dangerous air pollutants and the higher mortality rates they portend. Refining needs to be phased out as soon as possible, an end that will not be achieved if refiners are allowed to prop themselves up with staggering levels of ill-gotten gain.

Second, it is important that proceeds from the price gouging penalty be directed not only toward making California consumers whole, but toward the root of the problem – which is the oil industry’s inordinate power over California’s energy and transportation system.  As explained in NRDC’s supportive letter to Governor Newsom, the proceeds collected from industry need to be directed toward solidifying the state’s progress toward clean transportation – through, for instance, electric vehicle incentives, charging infrastructure, public transportation, and assistance with transition for oil-dependent workers and communities. 

The strength of California’s economy and climate goals depends on legislators having the courage and wherewithal to end the oil industry’s literal highway robbery in California, and direct the recovered loot toward our green energy future. And that’s no mystery.