Key Takeaways
Arizona and Nevada rely significantly on California for gasoline and diesel that is impacting the price of these fuels in their states.
Gasoline prices in California are higher on average than the rest of the United States because of the isolated nature of the state’s transportation fuels market, its special gasoline blend, its environmental program costs, and its state taxes.
Due to its onerous policies and regulations, California lost 12 percent of its refinery capacity, creating a tight market for transportation fuels that can result in gasoline and diesel price spikes.
Arizona and Nevada rely on California for much of their transportation fuels and their prices often reflect the higher prices of California as that state implements policies against oil and refinery production. Arizona has no significant oil reserves and no petroleum refineries while Nevada has just modest oil production and only one small refinery that processes 2,000 barrels of oil per day, producing just asphalt and road oil. Nevada gets its additional petroleum products from refineries in Los Angeles, the San Francisco Bay area and Salt Lake City, while Arizona gets its petroleum products by pipeline from southern California and Texas. Western states are paying a lot more for gasoline than most of the rest of the country as California is forcing its refineries to either close or convert to heavily-subsidized biofuels, affecting supply throughout the region. The tight market is keeping prices for gasoline and diesel in the Western states higher than most of the rest of the nation.
This map from Gasbuddy.com, shows that California’s high gasoline prices bleed over into surrounding states and that the middle of the country—where oil production occurs from North Dakota to Texas, has lower gasoline prices.
California Gas and Diesel Prices
California’s gasoline prices are higher than the rest of the country because of the state’s taxes and regulations. California has the highest gas tax in the country at 68 cents per gallon, compared to 39 cents for the national average, and it requires a special blend of gasoline that is more expensive to produce. California also has a cap-and-trade program and low-carbon fuel standard that add about another 46 cents a gallon. California’s gasoline price is currently around $4.62 a gallon, while the national average gas price is $3.20—a difference of $1.32. The above policies produce $0.75 cents of the difference, with $0.57 remaining.
Governor Newsom and the state legislature of California are responsible for these taxes and fees. But instead of admitting to intentionally increasing the price of fuel, the Governor and his legislative allies blame oil companies. Gov. Newsom stated that high prices are caused by “illegal price gouging by greedy oil companies.” His claim does not answer the obvious question—why are oil companies only greedy in California? Why are oil companies in places like Oklahoma, Wyoming, and Kansas, where gasoline prices are nearly $2 per gallon lower than in California, not greedy? The obvious answer is that California’s unique taxes, fees, and regulations drive prices higher in Newsom’s state.
Part of the difficult regulatory environment in California is caused by California’s requirement to use special fuel blends. The result of requiring boutique fuel blends is an insufficient supply to meet demand caused by fewer operating refineries that can make its special blend of gasoline.
Some California refineries, as well as other U.S. refineries, have closed in recent years reducing overall refining capacity. Some reasons for this include an onerous regulatory environment, rich inducements to switch to biofuels, and concerns about demand destruction due to COVID lockdowns and increased telecommuting. Many refineries are converting to producing biofuels that are more profitable because of large government subsidies and higher profits. In California, refiners can receive as much as $3.70 per gallon in benefits by switching to producing biofuels instead of making petroleum-based products.
California lost 12 percent of its refining capacity between 2017 and 2021 and may lose more. Big oil is exiting California as regulators and politicians are making it difficult for them to invest and operate in the state. State incentives have resulted in 11 percent of California refineries converting to renewable diesel, which will also result in a reduction in gasoline production as refineries typically produce a slate of petroleum products.
California imports oil that it does not produce itself or gets from Alaska, which costs more. California is the seventh largest producer of oil in the United States but its climate bill has put restrictions on oil and gas drilling that has oil producers exiting the state. Some California localities are even banning new drilling. Los Angeles County, for example, blocked new oil and gas drilling and is phasing out existing operations, expanding on a city-wide ban.
California’s oil and gas regulator almost announced a draft rule that would officially end hydraulic fracturing in the state. Hydraulic fracturing is one of the key technologies that has enabled the United States to increase its oil and natural gas production and become the largest oil and natural gas producer in the world. But instead of producing oil, California would prefer to import it. In 2022, the largest importers of oil to California came from Iraq, Saudi Arabia, Brazil, and Canada.
California’s Oil Refineries
California’s 14 oil refineries are located in the Bay Area, Central Valley, and Los Angeles and together process more than 1.6 million barrels of oil per day. Of the 14 oil refineries, 11 major refineries produce transportation fuels that meet California’s specific environmental standards for formulated gasoline. Its three smaller refineries produce other fuels. The 11 major refineries also provide most of Nevada and nearly half of Arizona’s transportation fuels. According to the California Energy Commission, “Because more than 90 percent of the gasoline consumed in California comes from in-state refineries, significant unplanned refinery outages contribute to increases in the price at the pump.”
Nevada and Arizona Gasoline Prices
According to AAA, the average prices of gasoline in Nevada is $3.90 a gallon, $0.70 cents per gallon above the national average. Its gasoline tax is $0.51 per gallon, $0.12 cents per gallon higher than the national average. The $0.58 difference is the about same as in California, indicating that Nevada, which gets most of its transportation fuels from California, must also pay the premium from California’s rules and regulations on refineries.
According to AAA, the average price of gasoline in Arizona is $3.24 a gallon, just slightly above the national average. Arizona’s state gasoline tax is a low $0.19 a gallon, $0.20 less than the national average, allowing it room compared to the state average of $0.39 a gallon to pay for the more expensive processing forced upon refineries in California. Arizonans are paying less for gasoline than California and Nevada since it gets less than half of its transportation fuels from California and has low state taxes.
Conclusion
Gasoline prices in California are higher on average than the rest of the United States because of the isolated nature of the state’s transportation fuels market, its special gasoline blend, its environmental program costs, and its state taxes. Due to its onerous policies and regulations, California lost 12 percent of its refining capacity, creating a tight market for gasoline and diesel. Arizona and Nevada rely significantly on California for gasoline and diesel that is impacting the price of these fuels in their states. If California keeps increasing its rules and regulations against oil and refinery production, Arizona and Nevada can expect higher gasoline and diesel prices.
