What is Behind California's High Gas Prices?

There Are a Few Reasons Why California Drivers Pay More For Gas Than Drivers In Other States. One Reason Is That California Has Higher Taxes On Gasoline Than Most Other States. Another Reason Is That California’s Environmental Regulations Require Gas To Be Blended With a Cleaner-Burning Additive, Which Adds To the Cost Of Gas.

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The average retail gas price in California was $4.32 per gallon in December 2022, while the average price elsewhere in the United States was $3.09 per gallon. This $1.23-per-gallon difference is due to several factors, including higher state gas taxes and California's clean air policies. These policies include a cap-and-trade program for greenhouse-gas emissions, a low-carbon fuel standard, and a fee for the abatement of leaking underground storage. California also mandates a cleaner-burning gasoline, which adds around 10 cents per gallon.

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According to calculations by Prof. Severin Borenstein at the University of California Berkeley’s Haas School of Business, the average state gas tax in California is about $1.09 per gallon, or 80 cents more than the average state gas tax elsewhere in the U.S. This is based on the monthly average for December 2022. However, this still leaves a 43-cents-per-gallon difference that is not explained by California-specific tax and air policy-related costs. Mr. Borenstein was a member of a committee that the California Energy Commission assembled in 2014 to better understand fuel-price fluctuations.

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After an explosion occurred at a Torrance, Calif. refinery in February 2015, a premium surfaced that has lasted long after the refinery restarted in 2016. In all, Mr. Borenstein estimates that what he calls a “mystery gasoline surcharge” has cost California’s drivers almost $50 billion in eight years.
It's not clear who is capturing the profits from the California gas price surcharge. It doesn't appear to be refineries - at least not directly. The price differential between California's spot wholesale gasoline and the dirtier fuel used elsewhere in the US has been fairly consistent before and after the Torrance refinery fire. That suggests that the surcharge is appearing between refineries and consumers' gas tanks.

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One important aspect to consider is that there is less competition among California’s retail fuel stations compared to other states. In other states, fuel stations typically have razor-thin margins and make up for it by selling things like coffee and lottery tickets. However, California has twice as many drivers per gas station as the rest of the country, according to an analysis presented by transportation-fuels consulting firm Stillwater Associates to the California Energy Commission in November. While the number of licensed drivers in California grew 14% between 2010 and 2020, the number of stations only grew 5%. While Californians do drive more electric vehicles than any other state, as of 2021 they only accounted for 1.6% of total vehicle registrations.

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According to data from Oil Price Information Service, the average fuel margin at gas stations in California was 79 cents per gallon in 2022, 79% higher than the 44 cents per gallon nationwide average. In Texas, where the margin was the thinnest, it was 26 cents per gallon. OPIS tracks the difference between the average price retailers charge for gasoline at their station and the price a refiner or distributor charges at the distribution point, known as the rack price.

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It is important to note that not all retail gas stations are collecting rich margins. What makes California unique is that a large percentage of its gas stations are still owned by refiners or have long-term contracts that give refiners significant control over fuel prices, according to Prof. Borenstein. In the so-called dealer system, a branded station with a long-term contract is locked into buying gasoline from a specific supplier—for example, Chevron, Shell or Valero—and cannot shop around if prices look more attractive at the rack. This means that some of the big California premium could be going back to those oil companies and refiners. Tom Kloza, global head of energy analysis at OPIS, said that while his firm can track prices at the racks, there is little visibility on what price refiners or oil companies charge to fuel stations with which they have long-term contracts.

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It's unclear why fat margins wouldn't attract more new gas stations, but part of the issue could be that California is transitioning away from gasoline faster than other states. This makes opening a new gas station less appealing, and some cities are even banning new gas stations altogether. Petaluma enacted a ban in March 2021, and a handful of other cities have followed suit. Alessandra Magnasco, a policy manager for the California Fuels & Convenience Alliance, a trade group, says the cost of doing business is simply higher in California, citing higher electricity prices, wages and permitting costs. But these factors existed before the Torrance explosion, making it difficult to tie it to the California premium. Prof. Borenstein notes that there needs to be an investigation into how much cost these regulations impose and how many gas stations have been forced to shut down because of them.

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Governor Gavin Newsom has proposed a "price-gouging penalty" on what he says are oil companies' excess profits. While it is not unique for politicians to blame high pump prices on "Big Oil", California's leaders may be right to do so in this case. They should also look in the mirror and consider the burden of regulation. Oil companies and retail gas stations may well be taking large profits, but the blame can't be entirely on the companies if policies deter competition. Mr. Newsom's other proposal - expanding California agencies' ability to investigate the cause of pricing irregularities - seems like an important step if it helps the state identify exactly where California's gas premium goes and why.

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A rapid shift to renewable energy sources can actually be a boon for gas stations and refiners that stick around, as California's gas price premium illustrates. As Mr. Kloza puts it, "it's a sunset industry, but it's going to be a beautiful sunset."