Governor Gavin Newsom claims oil companies are price gouging, which is the reason that gasoline prices are well over $1 more than the national average price in his state. Californians are paying an average of $4.60 a gallon for regulated unleaded gasoline, while the nation is averaging $3.43 a gallon. Newsom does not believe that California’s high taxes and endless regulations should make that much of a difference in the gas price, so it must be price gouging. He is also not admitting to the fact that California’s gasoline is a “boutique” fuel that only refineries in California produce and that he and President Biden are paying those refiners incredible subsidies to switch to biofuels, limiting supply. Clearly, economics is not a forte’ of the governor for economics 101 tells you that if you limit supply without reducing demand, prices will go up. It is no wonder that Californians are migrating to Texas and Florida. Gas prices in Florida, for example, average about $3.00 a gallon. And, even though California is all-in on green energy, the air quality is better in Florida and Texas than in California.
California’s Higher Gasoline Taxes
California has the highest gas tax in the country at 68 cents per gallon, compared to 39 cents for the national average, and the state 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. Those two taxes explain about 75 cents of the difference between the California gas price and the national average.
California’s Refinery Situation
California lost 12 percent of its refining capacity between 2017 and 2021 and is set to lose another 8 percent by the end of 2023. California refineries, as well as other U.S. refineries, have been closing due to an onerous regulatory environment, rich inducements to switch to biofuels and demand destruction due to COVID lockdowns. 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. The majority of the costs of these significant refinery transitions, however, must be paid for in the sale of products.
The refinery situation in California will get worse as Phillips 66 and Marathon Petroleum are permanently converting their East Bay refineries that currently make gasoline to produce renewable, bio-based diesel fuel from plant-based materials. That means there will be a penalty at the pump for gasoline consumers as there will be fewer sources to produce gasoline. Not enough gasoline in a state mostly using gasoline cars means higher priced gasoline. That could mean that California will need to import its specialized gasoline blend from refineries overseas that have the ability to produce it and ship it by ocean tankers, which will be more expensive for consumers. The last major refinery built in California was in 1968 when Valero built the Benicia refinery that has a capacity of 145,000 barrel per day. In 1968, Ronald Reagan was the governor of California and Lyndon Johnson was president.
Due to California’s limited refinery capacity, its gasoline prices are volatile to output disruptions. The fuel delivery system in California runs up against capacity limits all the time. For instance, California’s refineries remained at full capacity during the summer driving season to meet demand, delaying maintenance and repairs. During the summer months, oil refineries in California are required to produce a special blend of gasoline that limits negative effects on air quality that are more pronounced due to the summer heat and California’s unique geography. Gasoline prices in California this past summer were averaging around $6.00 a gallon. After the summer, refineries produce winter blends that are less expensive, normally beginning October 31. Because of the high summer prices, Newsom issued an order in September for state regulators to allow oil refineries to produce winter blend gasoline sooner, bringing gasoline prices down. His actions are proof that much of California’s cost differential is self-induced.
California’s Oil Production
California is the seventh largest producer of oil in the United States, but produces less than 1 percent of the oil it consumes daily, importing oil mainly from Ecuador, Saudi Arabia, Iraq and Colombia. As the state puts more restrictions on oil production, it may need to import even more of its oil. The state’s climate bill requires that new oil and gas wells or wells that are being reworked must be set back at least 3,200 feet from homes, schools and hospitals, and imposes strict pollution controls on existing wells within that distance. Companies with existing oil and gas wells within the buffers are required to monitor emissions, control dust and limit night-time noise and light. It is estimated that about 2.7 million Californians live within 3,200 feet of the existing oil and gas wells, and cities are sprouting up around oil wells that have been producing oil in California in some cases for a century. 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.
Further, California has put a near halt on issuing permits for new oil and gas drilling. The state’s Geologic Energy Management Division approved seven new active drilling well permits in the first half of 2023, which compares with over 200 it had issued by the same time last year. The delay in approvals is due to California’s progressive environmental laws and standards against fossil fuels despite its role as a major oil producer and a major oil-consuming state. While new drilling permits have steadily declined since Gavin Newsom became governor in 2019, the current rate of approval represents a sudden and dramatic drop. At mid-year, the oil industry had more than 1,400 permit applications for new wells awaiting state approval, half of which were over a year old. Newsom wants to phase out oil drilling in the state by 2045. Federal drilling permits for California have also dropped–from 166 to just 3 for the first 6 months of fiscal year 2023 from the same period in fiscal year 2022.
Further, California’s Assembly Bill 1167 deals with the issue of orphaned oil wells, which currently lack viable owners or operators. The bill requires full bonding for plugging and remediating these wells when transfers of ownership occur despite the state already having measures in place. It is yet another straw piled atop the camel’s back.
And, California’s new Climate Disclosure Law also affects oil companies operating in the state. Bill SB 253 will require about 5,000 companies to report the amount of greenhouse gas emissions that are both directly emitted by their operations and the amount of indirect emissions coming from such activities as employee business travel, waste disposal and supply chains. The law applies to public and private businesses that make more than $1 billion annually and operate in California. The companies are required to disclose their emissions starting in 2027. The law is being paired with another new law that requires companies with revenue over $500 million to report their climate-related risks.
California vs. Florida Air Quality
Even with all the environmental regulations and energy restrictions, California air quality is not the best in the nation. In fact, California has the worst air quality in the nation with only 60.60 percent of good air quality days. In 2018, across 112 cities, California averaged a PM2.5 concentration of 12.1 micrograms per cubic meter (μg/m3), which is considered moderate. Only 35.7 percent of its cities met the World Health Organization (WHO) target for annual PM2.5 exposure of 10 μg/m3, as compared to the national average of 81.7 percent.
According to the American Lung Association, California leads the charts for cities with the worst air pollution. The top four cities in the country with the worst air quality are located in the state: Los-Angeles-Long Beach, Visalia, Bakersfield, and Fresno-Madera-Hanford. California’s air quality is hampered by increasingly frequent and severe wildfires, mountainous terrain that traps pollution, and a warm climate that contributes to ozone formation.
In contrast, the PM2. 5 concentration in Florida is below the recommended limit given by the WHO air quality guidelines. Florida also has a warm climate, but controls its brush and forests with controlled fires. Florida ranks 7th in the nation for good air quality with 89.80 percent of good air quality days.
Conclusion
Governor Newsom is making matters worse for Californians with its climate laws and regulations that are supposed to make its air quality better, which is the worst in the nation. Instead, those laws and rules are increasing prices for its residents, and those prices are likely to get worse rather than better. In particular, its gasoline prices are likely to increase due to restrictions to limit oil production, its limited refinery capacity, its specialized requirements for the fuel, and its huge inducements to refiners to stop making gasoline and switch to making biofuels.
