What’s the Problem with California’s Gasoline Prices? – Energy Institute Blog



To develop effective solutions, policy makers must first understand the problem.

The rest of the US may have moved away from worrying about gas prices, but California will begin a special legislative session on the subject in 2023. California’s average price in December was $4.32, while the rest of the US averaged $3.09.In California politics, that her $1.23 difference is Rorschach inkblot test.

People on the right see a gap and see California’s wasteful government regulation and excessive taxation. Those on the left are watching price gouging by refiners and oil companies. And because we’re sure both sides know what the problem is, they already have their favorite solutions in place.

Post230109Fig1One of Rorschach’s inkblots (apparently an elephant leaning against a tree stump) (sauce)

My mother was a psychologist and I still remember the fascinating inkblots she used in some of the tests she did. Maybe that’s why I think there’s a need for data and analysis when it comes to California gasoline price spikes, rather than a collection of personal feelings about the causes. I’ve summarized what I know and what I don’t know about the difference.

match the price

Of course, the breakdown of pump prices starts with crude oil. Some crude oil is produced in California, but the marginal sources (the ones that set the market price) come from elsewhere. Once the crude oil is loaded onto a tanker, whether it is delivered to Japan, France, China, India, New York or California, the price does not vary much, so the difference in price cannot be explained. lot of research suggests that changes in oil prices will eventually be passed on almost entirely to gasoline.In other words, the average oil price in December is $81 per barrel It accounts for about $1.94 per gallon of retail gasoline prices in both California and other countries (since one barrel of oil contains 42 gallons). Similarly, there is a federal tax of 18.4 cents per gallon, which is the same nationwide. Crude oil volatility has caused much of the gasoline price rollercoaster this year, but not the California premium.

Small government advocates, oil producers, and refiners argue that the price difference is due to California’s higher taxes and environmental charges.after leaving california national average, the average gasoline tax in other countries was about 29 cents per gallon in December. California is a completely different story. There is a gas tax of 54 cents. Sales tax averages about 14 cents in December. Environmental Fee – Cap and Trade, approximately 21 cents. Low carbon fuel standard, about 8 cents. The charge for mitigating leaks in underground storage tanks is 2 cents. All of this adds up to 99 cents, 70 cents more than the rest of the US average. That said, much of this funding goes toward driver-preferred things like roads and bridges, social needs like R&D in low-carbon technologies and support for low-income households in the energy transition, and high-speed rail. and more controversial.

Post230109Fig2But that still leaves a difference of 53 cents per gallon, which can’t be explained by increased taxes and fees. Part of that is reflected in the spot price of gasoline, the price of large transactions (at least 1 million gallons) between refiners and distributors. These prices can be highly volatile depending on local supply and demand conditions in the short term, but in recent years California spot prices have averaged above average for his two other major spot markets, New York and the Gulf Coast. are also about 20 cents higher on average. As shown in the graph above. Part of the difference is the cost of producing clean-burning gasoline in California.Opinions differ somewhat, but the difference in cost is somewhere around it 10 cents per gallon.

Post230109Fig3Part of the Torrance Refinery after the 2015 fire (then owned by Exxon) (sauce)

Mysterious gasoline surcharge

So about 70 cents of the California difference is taxes and environmental fees, and about 10 cents is the cost of producing cleaner burning gasoline. However, the chart below shows that the retail price premium surged after a refinery fire in Torrance, Calif., in February 2015, and has exceeded that gap every month since. In December 2022, this Mystery Gasoline Surcharge (MGS) was 43 cents per gallon. It averaged 65 cents across the last year.

Post230109Fig4Multiply it by the approximately 40 million gallons Californians consume every day, and it starts to look like real money. am. Since the February 2015 refinery fire, MGS has totaled about $48 billion and his family of four in California about $5,000. As this graph shows, for the 15 years ending in February 2015, despite numerous refinery fires and other disruptions, MGS was virtually non-existent.

None of the MGS is found in crude oil and only a small share goes to business refineries. Most of the Californian’s overpayment for gasoline (beyond that directly attributable to taxes and environmental charges) is in downstream marketing, transportation and retail.

What Causes MGS?

But that doesn’t allow California refiners to step away from the hook. This includes fixed monthly fees, per-gallon pricing, quantity incentives, and volume discounts tailored to individual stations. These allow refiners to extract many of their downstream profits.Ah much higher share Gasoline in California is sold through sophisticated agreements with major branded outlets more than in other states.

And a much smaller share of California’s gasoline is sold through off-brand stations that buy the same quality gasoline at large merchandise distribution points called racks. All of this suggests that California is suffering from a lack of retail competition for gasoline. This is probably due to the excessive control of the retail market by upstream centralized refining companies.but that’s all suggest That’s the problem, and it doesn’t really indicate what policy could address it.

what to do about it?

Importantly, this means that the unexplained premium we pay for gasoline is unlikely to be addressed by policies aimed at refinery production. California gasoline stockpiling or inventory requirements, Temporary Exemption from California Clean Gasoline Requirements (I supported in some cases), increasing refining capacity or implementing a windfall profit tax on refinery operations. Abolishing taxes and environmental fees will not address MGS. It just reduces pollution and undermines the funding to build the necessary infrastructure.

That’s why I asked Santa last year (and some people in state government) Why MGS came out in 2015 and has been around ever since. I chaired his from 2014 to most of 2017, the all-volunteer National Advisory Board, not the all-volunteer, he meets 3-4 times a year, has no authority, and has no staff. Support was almost non-existent.The committee ultimately final presentation It said deeper research is needed.

Indeed, a full-scale investigation would take months and cost millions of dollars. And of course it’s not as satisfying as proposing a first aid solution that’s really not a solution at all. But now that MGS has spent nearly $50 billion on drivers over his eight years, isn’t it time to figure out why?

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