California Energy Policies are Affecting Gasoline Prices in Other States

Nevada Governor Joe Lombardo recently sent a letter to California Governor Gavin Newsom warning him against imposing an artificial cap on oil refineries’ profits because it could affect Nevada’s fuel prices. According to Lombardo, capping oil refineries’ revenues could lead to refineries either constraining supplies of fuels to avoid a “profit penalty” or shuttering their California operations entirely. Either action by refiners would likely lead to limited supplies and higher fuel costs for consumers in both states. Nevada is concerned because about 88 percent of its fuels are delivered from California via pipeline or truck.

California’s gas price gouging law, which was signed last year, authorizes the California Energy Commission (CEC) to set a maximum gross gasoline refining margin. This margin limits the price difference between the cost of oil before refinement and the cost of gasoline once it leaves the refinery. Refiners that exceed this margin may face penalties, regardless of the refiner’s own situation.

Now that fuel prices are rising in California, the CEC is to decide on the profit cap. California lawmakers, who authorized the CEC to impose the profit cap, however, are expressing some concerns that it could end up driving fuel prices higher. Recently, a representative from Arizona testified at a California state Senate committee hearing on the CEC’s proceeding. Arizona state Rep. Justin Wilmeth said a potential maximum refinery margin and penalty may actually increase retail prices for California, Nevada, and Arizona consumers and it may also cause California refineries to close prematurely. Newsom, however, has fought bitterly with oil companies, imposing new levels of scrutiny on their prices, joining state Attorney General Rob Bonta in a massive lawsuit over their supposed role in advancing climate change and backing the November campaign to keep California’s oil well setback law.  On top of all that, Governor Newsom has been slow in issuing permits for oil drilling in the state, issuing just 7 permits in the first half of 2023 from over 200 the same period last year.

California Policies Cause High Gas Prices

California’s gasoline prices are higher than the rest of the country because of the state’s taxes and regulations. California’s political leaders keep increasing taxes and fees on energy companies, which are ultimately paid for by Californians.  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 $5.19 a gallon, while the national average gas price is $3.60—a difference of $1.59. The above policies produce $0.75 cents of the difference, with $0.84 remaining.

Part of the remaining amount can be explained by California’s requirement to use special fuel blends, which are only supplied by California refineries, creating less competition due to fewer operating refineries that can make the special blends, also known as “boutique fuels.”.

Further, California lost 12 percent of its refining capacity between 2017 and 2021 and may lose more. Business is exiting California as regulators and politicians are making it difficult for them to invest and operate in the state. Refinery closures have resulted from 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. State incentives have resulted in 11 percent of California refineries converting to renewable diesel, which results in a reduction in gasoline production as refineries typically produce a slate of petroleum products. Consumers pay for these programs in each gallon of fuel they purchase.

California imports oil that it does not produce itself or gets it 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. This is particularly ironic as Los Angeles County consumes more gasoline than any other county in the state.

California’s Response to Governor Lombardo

Newsom’s staff lashed out, claiming the Nevada governor is politicizing rising gasoline prices on behalf of oil industry allies and trying to pass off blame on Newsom. According to Newsom staff, “This is a stunt to appease Governor Lombardo’s Big Oil donors, who contributed tens of thousands of dollars to his campaign.” The Newson spokesperson, Alex Stack, accused Lombardo of parroting Big Oil’s talking points, telling him that he knows full well that oil refiners are driving up gas prices and making massive profits that harm residents of both states. They did not address Governor Lombardo’s factual points regarding the impact of California policies on neighboring states’ gasoline prices.

Nevada and Arizona Should be Concerned

Nevada and Arizona 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. As California policies are forcing its refineries to either close or convert to heavily-subsidized biofuels, the supply of transportation fuels to other states are affected. The tight market is keeping prices for gasoline and diesel in the Western states higher than most of the rest of the nation.

According to AAA, the average price of gasoline in Nevada is $4.36 a gallon, $0.76 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 $0.64 difference, while less than the premium in California, indicates 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 $3.90 a gallon, $0.30 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. Nevada and Arizona 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, Nevada and Arizona can expect higher gasoline and diesel prices.