Are oil companies exploiting Californians for record profits? How can government regulators stop refineries from simultaneously shutting down for maintenance? What are the best approaches to avoid future gas price hikes in the Golden State?
As state regulators and lawmakers try to better understand what’s driving California’s high gas prices and consider whether Gov. Gavin Newsom’s proposal to tax oil company profits is the answer, one thing is clear: They need more information and data from the companies that produce and distribute gas. gasoline.
The California Energy Commission explored these questions at a meeting Tuesday where they heard from industry analysts. The members of the commission could not get any help from the companies that produce more than 90% of the state gasoline.
Chevron, Marathon, PBF Energy, Phillips 66 and Valero all declined to participate in the hearing. In letters to the commission, most said that being open about their operations, maintenance and inventory levels would force them to reveal their trade secrets. However, PBF Energy added that “Governor Newsom’s politicization of this matter, fueled by his misrepresentation and interpretation of our (Q3 2022) earnings, precludes us from attending this hearing.”
According to PBF Energy’s Q3 financial report, the company’s profits rose from $59.1 million last year to $1.06 billion this year — an increase of nearly 1,700%.
Newsom called the reasoning of the oil companies “pathetic” and promised to “hold these companies accountable.”
“Every Californian deserves to know why we’re hurting at the pump, even at a time when gas prices across the country are down and crude prices are down,” Newsom said in a statement. “The oil industry had a chance to explain today why they are making 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 oil companies.
“To say I’m disappointed that some of our biggest oil producers in the state aren’t here is probably an understatement,” said Sen. Monique Limon (D-Santa Barbara). “Having people at the table who care about this issue and want to be part of the solution is critical to how we move forward.”
The commission did not make any formal policy recommendations. But the issues discussed in the day-long hearing are expected to help lawmakers consider Newsom’s proposal in October to tax oil companies when they make excessive profits and fund taxpayer breaks.
A special session will begin Monday to discuss the nature of the windfall tax Newsom has called for this fall.
Questions about the state’s high gas prices go back decades, but earlier this year, an unprecedented gap between the average price of gasoline in the Golden State and the rest of the country has renewed calls for answers. At this year’s peak in gasoline prices, Californians were paying $2.60 a gallon over the national average — an unprecedented margin.
Since then, the average price of gasoline in California has steadily declined, with prices on Tuesday falling below $5 a gallon for the first time since the spring.
Despite the recent price drop, Newsom and proponents of the windfall tax argue that it will help deter oil companies from unreasonable price increases in the years to come. Future taxes are intended to prevent exploitation by imposing an additional tax on companies when profits exceed statutory limits.
The oil industry strongly disagrees.
The new tax will only raise gas prices in California, said Catherine Reheis-Boyd, CEO of the Western States Petroleum Association.
“The only consequence of a steep corporate tax would be to make the problems worse,” he said. “You’re sending a complete anti-investment signal to anyone who wants to do business here.”
A half-dozen economists who previously spoke to this news organization said the windfall tax would do little to lower California gasoline prices, but could be successful in restoring profits.
Long history of high California gas prices
Drivers in California have long paid more for gas than other states.
Much of this is due to California’s high excise tax, strict environmental regulations that require special fuel blends to limit pollution, and the state’s isolated fuel market. No pipelines carry gasoline to California, so the state relies almost entirely on in-state refineries to meet its gasoline needs.
Newsom and tax supporters, however, argue that these factors do not justify the recent excessive price increases, especially as the companies have enjoyed historic profits at a time when the price of crude oil has fallen.
Most of the state’s five major refineries have more than doubled their earnings over the past year.
“It’s unconscionable that (Californians) are paying record prices, especially low-income families are paying record prices,” said Commissioner Patty Monahan.
State lawmakers to debate new windfall taxes for 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 of a windfall there is and who will qualify for the rebates.
Lawmakers typically convene in early December to swear in new members and then take a break for the holidays in January before really diving into the new legislative session. So lawmakers don’t expect to take serious action on the windfall tax until early 2023.
It is currently unclear how much support Newsom’s proposal has among lawmakers. State Democratic leaders said they were just looking forward to seeing the governor’s detailed plan.
Last year, California lawmakers took the first step toward greater transparency in the economics of major oil companies. The new law requires refiners to disclose monthly the value of the crude oil they buy, how much they pay to turn it into gasoline, and what they sell it for.
But Drew Bohan, executive director of the state’s Energy Commission, said more understanding is needed.
Bohan did not comment Tuesday on the governor’s proposed windfall tax, instead championing a new state regulation that would force oil companies to report scheduled and unscheduled maintenance — a factor believed to have contributed to the spike in gasoline prices seen earlier this year.
“Getting that information early will really help inform the decisions we need to make,” Bohan said.
Meanwhile, Severin Borenstein, an energy economist at UC Berkeley, called on state officials to investigate contracts between California refineries and gas retailers.
Borenstein, who has spent years studying California gas prices, said the windfall tax won’t solve a larger problem in the state’s gas market, calling it a “mystery gas supplement.”
According to Borenstein, Californians currently pay 80 cents more per gallon after taking into account the state’s higher taxes and environmental fees — a price premium not explained by the oil and gas industry.
“Just understanding how refineries work doesn’t solve much of the problem,” he said. “There are complex contracts between refineries and retailers that we know next to nothing about that could easily be used by refiners to maintain prices.”
This story was originally published November 29, 2022 at 1:58 p.m.