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Amid historically high California gas prices that have drained drivers’ wallets, Gov. Gavin Newsom declared the state’s oil industry an outlaw.
For decades, California has suffered the nation’s most expensive gas because of higher taxes and clean fuel requirements, but that differential reached extreme levels in the spring and fall after Russia’s invasion of Ukraine and the subsequent ban on Russian oil.
In October, when AAA data show Los Angeles hit a record $6.49 a gallon and prices were nearly as high elsewhere in Southern California, drivers across the nation were filling up on average for $3.79, a painful price difference of $2.70 per gallon. And with that, the governor had had enough.
“California’s price-gouging penalty is simple — either Big Oil reins in the profits and prices or they’ll pay a penalty,” declared Newsom, when he announced a plan this month aimed at clamping down on company profits.
The plan follows a deal the governor worked out with the Legislature to provide Californians a one-time gas tax refund this year ranging from $200 to $1,050 for individual filers and families.
Refiners deny they are price gouging and cite a litany of other causes for high fuel costs, primarily supply, demand, regulations and taxes.
You’ve seen the signs advertising $6.95, $6.99 or even $7.05 for a gallon of regular unleaded. But who’s buying it, and why?
For the record:
4:46 p.m. Dec. 13, 2022A previous version of the “Oil companies earn more per gallon in the West Coast region” graphic miscalculated per-gallon profits. The article previously said four major oil companies earned on average 85 cents more per gallon on the West Coast than nationally; the correct figure is 15 cents. In addition, the article stated that Hawaii has no refineries and imports all its gasoline; Hawaii has one refinery and imports a portion of its gasoline.
What’s more, California gas prices have dropped sharply in recent days to $4.60 for a gallon of regular — but they also fell this summer before rising again.
One thing both sides can probably agree on: A ban on the sale of new gasoline-powered vehicles set to go into effect in 2035 will probably lead to less fuel supply as refinery capacity dwindles — but more conflict for years to come.
Here are four charts to help you understand what’s at issue.
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Californians pay more for gas
There’s lots of debate and heated rhetoric over California’s high gas prices, but there are a handful of factors most agree at least contribute to the problem.
California is a high tax state, and that extends to the excise tax slapped on a gallon of gas. The tax, which is adjusted annually, pays for planning, constructing and maintaining roads and mass transit systems.
In June, the tax rose from 51.1 cents to 53.9 cents per gallon, second only to Pennsylvania. Republicans have called to suspend the tax or at least not continue indexing it to inflation, but the billions of dollars it generates for infrastructure is considered vital.
The state is famously the smoggy car capital of the nation, too, which means refiners must produce a more expensive version of cleaner-burning gas during the hotter months.
The state’s decarbonization policy will cut pollution and greenhouse gases, but the price of gasoline is likely to remain persistently high.
There are estimates that the summer blend might cost as much as 15 cents a gallon more than the winter blend, which adds up when topping off but helps with things like breathing and combating climate change.
But those two costs are consistent and don’t produce the infuriating spikes that the oil industry typically blames on refinery downtime due to either maintenance or repairs — but which critics allege are pretexts for raising prices.
The state wouldn’t be subject to such woes, though, if not for another undisputed fact: California is a gas island with no major interstate pipelines, leaving it reliant primarily on in-state production and more costly trucks and tankers. At the same time, the number of refineries cranking out gasoline has dropped to 10 from almost 50 a few decades ago.
That means when one refinery is down, expect to feel the pain.
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Oil prices are the biggest driver
For all the controversy over the primary cause of California’s high gas prices, there’s this simple fact: The price of crude, a global commodity, is the biggest determinant of what you pay.
At an average pump price of $4.56 per gallon in early December, crude oil accounted for 42% of the cost, according to the California Energy Commission.
And although derricks still dot local hillsides, most crude comes from foreign countries. As of 2021, nearly 18% arrived from Ecuador, slight more that 16% from Saudi Arabia and slightly less than 16% from Iraq, the commission said.
Banning Russian oil will affect West Coast gasoline prices more than those in other parts of the country because the West Coast uses more Russian oil.
Those figures help explain why Russia’s invasion of Ukraine led to such a large surge in local gas prices.
Russia is a major producer, and the loss of its crude had a ripple effect on global energy markets, raising prices for crude pumped elsewhere. In addition, Russia’s best U.S. customers were refineries in California and Washington, which sends a large percentage of its gasoline to the Golden State.
More bad news: The proportion of foreign crude fed into the state’s refineries should rise as a state ban on new hydraulic fracking permits takes effect in 2024 and the governor pushes to phase out all drilling in the state by 2045.
The bottom line? California drivers will be at the mercy of global events for as long as they pump gas.
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A ‘surcharge’ no one can explain
UC Berkeley energy economist Severin Borenstein was the first to identify what he dubbed the “mystery gas surcharge” that developed after a 2015 explosion at the Exxon Mobil refinery in Torrance.
The resulting fire was extinguished, the refinery was repaired and fuel supplies eventually returned to normal. And yet, Californians continued to pay more than motorists in any other state, even Hawaii (usually), which has no refineries and must bring in all its gasoline by tanker.
Borenstein says the surcharge can’t be explained by taxes, fees or the higher costs of the cleaner fuel the state requires in the summer to reduce smog. There also have been data showing the surcharge is higher at branded stations.
Why are California’s gasoline prices so much higher than those of the rest of the country?
In September, the governor signed the Oil Refiner Price Disclosure Act by Sen. Ben Allen (D-Santa Monica) to glean more information from the industry. It requires the state’s refining companies to report each month on the cost of their crude, their wholesale prices and their profits per gallon.
“What we’re trying to get at is what’s behind this mystery gas surcharge,” Allen said of his legislation.
It remains to be seen how much clarity the new data submitted to state regulators will bring.
The Western States Petroleum Assn. trade group said the legislation was unnecessary because the industry already submits large amounts of data to the state on a monthly basis.
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Larger profit margins on the West Coast
Steep gas costs have been bad for California drivers. But they’ve been very good for the large energy companies that refine oil into fuel in the state.
The four major oil companies that report per-gallon profits for West Coast refineries earned on average 69 cents per gallon here compared to 54 cents per gallon nationally so far in 2022, according to analysis by Consumer Watchdog. (The biggest, Chevron, reports West Coast refining profits annually, not each quarter.)
Those kinds of profits are what spurred the governor last week to announce a plan to cap refinery profits in California — and employ locker-room rhetoric.
“For me this is about never seeing those spikes again,” Newsom said at the state Capitol. “You guys are all being screwed and taken advantage of.”
Gov. Gavin Newsom reveals the first details of his plan to cap oil refinery profits in California, which has the highest gas prices in the nation.
The Legislature will need to establish a “maximum gross gasoline refining margin” based on the average profit per barrel that an oil refiner earns for wholesale gasoline.
The plan would allow the California Energy Commission to assess administrative penalties for violations that would go into a fund that lawmakers could return to residents. The proposal also would give the Energy Commission expanded authority to investigate supply and price issues.
The industry, which spends millions lobbying legislators, strongly opposes the plan, blaming the high prices on the state’s efforts to phase out fossil fuels. It’s far from certain the proposal will make it into law.
