Gaspriceanalysis/gas price in California already over the mark

Most Americans are hoping gasoline prices don’t go over $4 this summer. But California gas stations have already zoomed well past that level, and are now over $5 per gallon. To give drivers some relief, the state may try something never attempted before—capping the profits of the companies that make the fuel. Chevron and some other top gasoline producers in the state are fighting it aggressively, saying the move will backfire and potentially cause prices to rise even more.

California’s attempts to find new ways to lower its sky-high gas prices highlight the state’s tricky transition to cleaner transportation fuels. California’s transition is a success story in many ways—the state accounts for over one-third of the country’s electric vehicle sales, and more than half of the diesel sold in the state is made from lower-carbon plant and animal oils. Gasoline car sales will be banned in 2035. But the road from now until that date is looking particularly fraught. Winding down an industry as central to California life as oil is sure to be volatile for consumers.

Adding a margin cap for gas-sellers could eventually cause the supply of gas to fall—and prices to rise, warns Andy Walz, the president of Chevron’s Americas Products business. “I’m worried that the environment in California is such that companies like Chevron and others are not willing to invest,” he said in an interview.

Related video: Americans for Prosperity cuts gas prices to highlight impact of inflation under Biden (Fox Business) or inflation is a red or blue issue.

California is offering drivers money to test its alternative to the gas tax

Nevada governor Joe Lombardo has also raised alarms about the California law, arguing in a letter this month to California Gov. Gavin Newsom that it could cause prices to rise in his state if refiners pull back production. Nevada gets 88% of its gasoline from California refineries. Arizona also relies heavily on California refineries. Newsom’s staff told reporters afterwards that Lombardo was simply “parroting” oil industry talking points.

The big gasoline decisions will be coming in the next few months. The California Energy Commission says it will decide on whether to establish a margin cap and any penalties for exceeding it by the end of this year. The state passed a law last year giving it that authority, but the commission first needs to make sure that such a cap wouldn’t just exacerbate the problem. The law says it shouldn’t set any margin or penalty “unless it finds that the likely benefits to consumers outweigh the potential costs to consumers.”

The state’s gasoline price premium is nothing new, but it appears to be getting even worse. California drivers have paid more for gasoline than Americans elsewhere for decades because of geographic, political and environmental reasons. But the gap has widened recently. Today, California drivers pay on average $5.14 per gallon, versus the national price of $3.61—a difference of $1.53 per gallon. A year ago, the gap was $1.25, even though the price of gasoline nationally was about the same as it is today. A decade ago, it was about 35 cents.

State data show that the premium gets particularly bad at moments of crisis, such as in 2022 after Russia invaded Ukraine. Average prices in the state rose as high as $6.44 per gallon that June, and the gap rose as high as $2.59 per gallon later that year, according to the California Energy Commission.

A commission economist said in a recent presentation that refinery margins have gradually expanded over the past decade, from around 40 cents per gallon to around 60 cents—a disproportionate jump compared to the cost of crude oil.

California’s gas is more expensive for an array of reasons—from higher taxes, to environmental rules, to a scarcity of refiners and independent gas stations, to an unexplained additional gap that one California economist calls the “mystery gasoline surcharge.”

The commission says that oil companies have no strategy or incentive to mitigate these price spikes, and that the industry “does not disagree” that the problem leads to better profits for the companies.

Walz says that Chevron’s margins are “about the same, a little bit better” in California than in other states. But it’s not like Chevron or the gas stations it sells to are rolling in the dough by up-charging Californians, he said. The difference comes down to the cost of doing business in the state—from land to wages, he asserts.

“You’ve got to get a better margin, either on the convenience items, or you’ve got to sell more, or you have to sell at a higher margin,” he says. “Interest rates have gone up, people finance these things. And they need margin to cover that cost.”

Chevron says it has just under 20% market share of gasoline sales in California. Walz says its market share doesn’t allow the company to charge higher prices, because competition remains fierce.

Other refiners operating in the state include Marathon Petroleum, Valero Energy, PBF Energy and Phillips 66. Those companies either declined to comment or did not respond to requests for comment.

Kevin Slagle, a spokesman for the Western States Petroleum Association, a trade group representing various kinds of oil companies, says that the idea that gasoline producers are making unconscionable profits is false, and is refuted by the state’s own data showing refiner margins have sometimes been negative.

On its face, selling gas seems like a simple business. Crude oil is pumped out of the ground, and sent to refiners, who process it into gas and send it along to stations. Everybody in the supply chain gets a piece of the action (even the gas station attendants in New Jersey, who are mandated by state law to pump it for you). The latest U.S. government data from March shows that 56% of the price of gas comes from the price of crude oil, 19% comes from refining costs, 15% is from taxes and 10% from distribution and marketing.

Taxes and environmental regulations change the breakdown in California. In that state, crude made up 41% of the cost in 2023, with refining making up 18%, and distribution and marketing another 12%. Federal, state and local taxes made up 18%, and environmental rules another 10%. The state’s cap-and-trade environmental program charges refiners and other carbon-emitters, and those costs have been rising, Walz said. “It’s going to get extremely expensive to run any kind of a manufacturing facility that makes anything in California because those costs keep rising,” he said.

But the taxes and regulations aren’t the only things that make California stand apart. The state is essentially “an island” when it comes to fuel, says State Senator Steven Bradford, chair of the senate’s Energy Committee. California uses a cleaner blend of gasoline that isn’t made elsewhere, so there aren’t pipelines going into California from other states that could cover supply gaps.

Refiners have also been closing in California for years, reducing overall supply options. There are now just nine, down from 40 in 1983. Lately, refinery operators have been transitioning some of their refineries into making renewable diesel from plants rather than gasoline. When one of those nine remaining refineries goes down for maintenance, prices tend to spike even higher.

Severin Borenstein, an energy economist at Berkeley’s Haas School of Business says that there’s a “mystery gasoline surcharge” in California that can’t easily be explained by taxes and environmental costs. That mystery charge averaged 65 cents in 2022, Borenstein calculated. He thinks the surcharge relates to the marketing, transportation, and retailing of gas, but that refining may play a role too.

More gas in California is sold at “branded” stations than in other parts of the country. The branded stations are usually owned independently, but they sign complex contracts with refinery operators like Chevron to sell its special formulation of gas and use its logo on their stations. Gas at branded stations is usually more expensive than generic ones, industry analysts say. While lower-priced gas-sellers like Costco operate there, California has fewer independent stores like Wawa that make competition more intense in other states, said Tom Kloza, global head of energy analysis at OPIS. That allows existing operators to make more money.

“I’ve said before that gasoline is a sunset business in California (thanks to bans on internal combustion engine vehicles in 10 years) but it is quite the beautiful sunset,” Kloza says.