Why California gasoline is so expensive

Link to article: https://stillwaterassociates.com/why-california-gasoline-is-so-expensive-2/

Feb. 3, 2016

Dan McSwain, The San Diego Union-Tribune

Although oil markets are bankrupting producers and draining government coffers from Moscow to Riyadh, plummeting costs are filling the pockets of ordinary consumers this year, right?

Um, wrong, at least in California, where state government helps the refining industry keep gasoline prices aloft for months at a time.

On Monday, at $2.55 a gallon, the average cost of gasoline was 11 cents higher than it was a year ago in the Golden State, the federal Energy Information Administration reports.

You read that right. Unlike the rest of the nation, our price actually moved higher as the benchmark West Texas crude oil tumbled by 33 percent from a year ago and 50 percent since July.

For the most part, this ability to defy gravity is limited to California, in a longstanding, sometimes extreme phenomenon I call the Gouge Gap.

Falling oil prices have sent the U.S. average tumbling to $1.82 a gallon Monday — down 25 cents from this time last year and 73 cents below California’s average.

Bear in mind that these are averages. In Tulsa, Okla., drivers were paying $1.29 a gallon Friday, compared to the screaming deal of $2.49 my neighborhood Costco offered this weekend.

This kind of persistent gap is far from trivial. Californians burned roughly 15 billion gallons of gas in fiscal 2015, so that 73-cent average works out to nearly $11 billion a year in surplus costs to drivers.

So why does gas cost so much more in California? I’ve been covering energy markets for 16 years, and this is easily the top question I get from readers. No. 2 is, who’s to blame?

Here’s the short answer to both questions, from industry analyst David Hackett of Stillwater Associates: “Arguably, the government is keeping consumers from buying cheap gas.”

I know what you’re thinking: It’s an election year, and here we have just another business guy blaming government for industry predation of consumers.

Maybe so. But Hackett is also an expert on the Petroleum Market Advisory Committee created by the California Energy Commission to, among other things, uncover evidence of anti-competitive practices and guide lawmakers in setting policy.

So let’s unpack this idea that government is mostly to blame, along with my view that regulations tend to produce excess profits for the good folks who refine crude oil and distribute gasoline. No conspiracies required.

We begin with taxes. California’s combined state and federal taxes add 59 cents to each gallon of gas at the pump. That’s 11 cents above the U.S. average, reports the American Petroleum Institute.

Subtracting 11 cents in higher taxes from our 73-cent gouge gap leaves 62 cents of unexplained cost.

California has tacked on about 12 cents in fees for its “cap and trade” market and low-carbon fuels standard. This gets us to 50 cents.

State regulators also mandate a pollution-reducing blend that costs more to produce, although how much varies by refiner. When you compare the U.S. average for reformulated gas to California’s, the unexplained gap narrows further by 20 cents. Notably, the public overwhelmingly supports such environmental costs.

To review, taxes and environmental mandates directly account for 43 cents per gallon of the 73-cent cost we paid Monday above the U.S. average, leaving us with 30 cents to go.

Market forces — meaning profits for somebody — generally explain this 30 cents per gallon. If you guessed that regulators play a role here, too, go to the head of the class.

For openers, California’s boutique fuel makes it harder for competitors to crank up imports when prices soar.

This effect was more pronounced in years past, when only one or two refineries outside the West Coast could make our blend. Now supply can come from India, Singapore, South Korea, England and Eastern Canada. Although the development has reduced California’s status as an island market, shipping costs add to retail prices.

What’s more, environmental market effects can be very direct. Last year roughly 20 percent of Southern California’s gasoline supply vanished after a Feb. 18 explosion damaged the giant ExxonMobil refinery in Torrance.

Workers developed a temporary fix, but regulators won’t approve full operation because it emits too much particulate air pollution. So the refinery has lost 80 percent of production until its main refining unit is fully rebuilt, which isn’t expected until sometime in the second quarter of this year.

Of course, tight supplies for whatever reason tend to boost profits for refiners that can keep running.

A recent report by the Energy Commission found that the overall “refining margin” jumped by 57 percent in December compared to the same month in 2014.

Refining margin simply measures the difference between the cost of crude oil and the retail price before taxes, so it isn’t the same as profit margin. Still, the CEC analysis suggests that California’s refiners and distributors are keeping much of our 30 cents per gallon in above-average costs after accounting for state taxes and reformulating costs.

It isn’t like the rest of the U.S. refining industry is suffering. Their major input, crude oil, has decreased in cost by 33 percent in a year. And national gasoline consumption was on pace to grow by 2.7 percent in 2015, based on EIA figures through October.

Indeed, while a global slowdown has grabbed headlines, overall demand is still growing. The world may be drowning in cheap oil, but refineries are struggling to keep up.

California’s drivers have certainly joined the party, with consumption growing by 3.5 percent last year, reversing a post-2008 trend of shrinking demand.

Sure, we don’t like paying more than the rest of the nation, but consumers remember well the dark days above $4 a gallon.

“You could argue that California consumers are happy that gasoline is cheaper than it was and are driving more,” Hackett said. “This probably explains why there is no outcry about high gasoline prices.”

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