Are oil companies exploiting Californians to rake in record profits? How can state regulators stop refineries from shutting down for maintenance at the same time? What are the best approaches to prevent future gasoline price spikes in the Golden State?
As state regulators and legislators try to better understand what’s driving California’s high gas prices and weigh whether Gov. Gavin Newsom’s proposal to tax oil company profits could be the answer, one thing is clear: they need more information and data from the companies producing and distributing the gasoline.
The California Energy Commission pursued those questions at a Tuesday meeting where they heard from industry analysts. Commission members did not, however, get any help from the companies that produce more than 90% of the state’s gasoline.
Chevron, Marathon, PBF Energy, Phillips 66 and Valero — all declined to participate in the hearing. In letters to the commission, most said speaking publicly about their operations, maintenance and inventory levels would force them to divulge trade secrets. PBF Energy, however, added that “the politicization of this issue by Governor Newsom, heightened by the misleading information he released and commented on related to our (2022 3rd quarter) earnings, precludes us from participating in this hearing.”
According to PBF Energy’s Q3 financial report, the company’s profit jumped from $59.1 million last year to $1.06 billion this year — an increase of nearly 1700%.
Newsom called the reasoning by oil companies “pathetic” and vowed to “hold these companies accountable.”
“Every Californian deserves to know why we were being fleeced at the pump even as gas prices declined across the country and crude oil prices were going down,” Newsom said in a statement. “The oil industry had their chance today to explain why they made record profits at our expense but they chose to stonewall us.”
At Tuesday’s meeting, commissioners echoed the governor’s sentiment and criticized the absence of the oil companies.
“To say that I’m disappointed that some of our biggest oil producers in the state are not here is probably an understatement,” said Sen. Monique Limón (D-Santa Barbara). “Having people at the table who care about this issue and who want to be a part of the solution is critical to how we move forward.”
The Commission did not make any formal policy recommendations. But the matters discussed at the day-long hearing are expected to help inform decisions by legislators who will consider Newsom’s October proposal to tax oil companies when they reap excessive profits and to fund rebates to taxpayers.
A special session to debate the merits of a windfall profits tax, which Newsom called for this fall, will begin on Monday.
Inquires into the state’s high gas prices date back decades but an unprecedented gap between the average price of gasoline in the Golden State and the rest of the country earlier this year renewed calls for answers. At the peak of this year’s gasoline price spikes, Californians were paying $2.60 per gallon more than the national average — a margin never seen before.
Since then, California’s average price of gasoline has steadily slid, with prices on Tuesday dropping below $5 per gallon for the first time since the spring.
Despite the recent price drop, Newsom and proponents of a windfall tax argue that it would help discourage oil companies from pursuing unwarranted price spikes in the years to come. Windfall taxes are intended to prevent exploitation by imposing a surcharge on companies when profits exceed a legally-established limit.
The oil industry adamently disagrees.
Catherine Reheis-Boyd, CEO of the Western States Petroleum Association, said a new tax would only drive California gas prices higher.
“The only result of a windfall profit tax will make the problems worse,” she said. “You are sending the absolute opposite investment indication to anyone who wants to do business here.”
A half dozen economists who previously spoke to this news organization said a windfall profits tax would do little to drive down California gasoline prices but could be successful in clawing back profits.
A long history of high California gas prices
Drivers in California have long paid more for gas than those in other states.
Much of that is due to California’s high excise tax, strict environmental regulations that require special fuel blends aimed at limiting pollution and the state’s isolated fuel market. No pipelines carry gasoline into California so the state relies almost entirely on in-state refineries to meet its gasoline needs.
Newsom and tax proponents, however, argue that those factors don’t justify the recent extreme price spikes, especially because companies were making historic profits even as the price of crude oil was falling.
Most of the state’s five main oil refiners saw their earnings more than double over the past year.
“The fact that (Californians) are paying record prices, and especially low-income families are paying record prices, is unconscionable,” said Commissioner Patty Monahan.
State lawmakers to weigh new windfall tax on oil companies
The special legislative session begins in less than a week, but Newsom and his administration have offered few specifics about the plan. Many questions remain unanswered, including how the tax will affect gas prices, how much profit constitutes a windfall and who will be eligible for the rebates.
Lawmakers typically convene in early December to swear in new members and then break for the holidays before truly diving into the new legislative session in January. Thus, lawmakers don’t expect to take serious action on the windfall profits tax until the start of 2023.
It is unclear how much support Newsom’s proposal currently has among legislators. State Democratic leaders have said only that they looked forward to seeing the governor’s detailed plan.
California lawmakers last year took a first step toward gaining more transparency into the economics of its major oil companies. A new law requires crude oil refiners to disclose monthly the cost of the crude oil they purchase, how much they pay to convert it into gasoline and what they sell it for.
But Drew Bohan, executive director of the state’s Energy Commission, said more insight is needed.
Bohan did not comment on the governor’s proposed windfall tax on Tuesday but instead advocated for a new state regulation that would compel oil companies to provide information about planned and unplanned maintenance — a factor believed to have contributed to the gasoline price spikes seen earlier this year.
“Getting that information early would really help inform the decisions we have to make,” Bohan said.
Meanwhile, Severin Borenstein, an energy economist at UC Berkeley, urged state officials to investigate the contracts between California oil refineries and gas retailers.
Borenstein, who has spent years studying California gas prices, said a windfall tax would not address a larger problem in the state’s gas market, which he calls the “mystery gas surcharge.”
According to Borenstein, Californians are currently paying 80 cents per gallon more than the rest of the county even after factoring in the state’s high taxes and environmental fees — a price premium that has gone unexplained by the oil and gas industry.
“Simply figuring out how refineries work is not addressing most of the problem,” he said. ”There are complex contracts between refiners and retail outlets that we know almost nothing about that could be easily used by refiners to keep prices up.”