Gasoline Market Analysis Experience

May 30, 2023 By , ,

May 2023

In the course of Stillwater’s policy work, we have been retained to look at issues like fuel markets, distribution, and pricing. Stillwater routinely analyzes supply and demand outlooks for a variety of clients in both the private and public sectors.   As gasoline pricing has become a topical issue of late, below we bring together and highlight our policy work specifically pertaining to gasoline price controls and California gasoline price spikes.

Hawaii Gas Cap

In 2002, the State of Hawaii retained Stillwater to analyze its gasoline price control legislation – the Gas Caps Law. This legislation tied the price of gasoline to spot prices on the Mainland. The Hawaii legislature implemented the law on September 1, 2005 and rescinded it the following May after it was found to increase consumer costs and impact the buying experience by increasing price volatility and creating lines at the pump.

Examples of press reports on the Gas Caps law include:

Stillwater’s analysis around this issue includes:

Windfall Profits Penalty

In the fall of 2022, gas prices spiked in California. At the request of the California Energy Commission (CEC) and the California legislature, Stillwater made a number of presentations concerning the 2022 gasoline price spike. Stillwater’s presentation to the CEC in late November 2022 was designed to address the causes of the September/October price spike as well as ongoing high retail gasoline prices. We also expressed our concern about the upcoming energy transition.

In the winter of 2022, SB2 was introduced into the California legislature to create a Windfall Profits Penalty (WPP). The bill was signed into law in the spring of 2023. At the request of the CEC and the California legislature, Stillwater was also asked to provide comments around the WWP concept while it was in proposal phase.

On January 24, 2023, we spoke to Assembly members in depth about crude oil, international flows of petroleum products, the gasoline supply chain, the complexity of the gasoline retail market, and the WPP issue. Then, on February 22, 2023, prior to the finalization of SB2, we spoke to the California Senate Committee on Energy about downstream fuel industry issues, the effects of gasoline price controls, and the likely impacts of the proposed WPP.

Bottom Line: Stillwater is regularly asked to comment on downstream fuel industry issues and proposals. Based on our long history working in this space, our view is that a WPP is likely to cause market distortions like the federal price controls and Hawaii gas caps law created.

Gasoline Price Spikes

The California gasoline market has a history of price volatility, generally driven by unexpected supply problems. This has resulted in state government investigations, including those undertaken in 1999, 2004, 2014, 2019, and 2022, plus an antitrust lawsuit against two international trading companies who have been accused of taking advantage of the market disruption following a refinery explosion in 2015.

Stillwater was first retained by the CEC in 2002 to look at the potential for a Strategic Fuel Reserve for the state to help smooth out the market volatility. The need for this study was expressed in the California Attorney General’s report on gasoline price volatility.

Our study on the Strategic Fuel Reserve was one of a number that the CEC commissioned to look at potential solutions to reduce gasoline price volatility. To do that study, we had to understand the California marketplace. Our process included 44 stakeholder interviews, and our final report concluded that a state-owned gasoline fuel reserve would be workable.

Because of our experience in the market, we were retained by the U.S. Energy Information Administration (EIA) to write a report about transportation fuels on the U.S. West Coast. The report has become a standard reference work for market participants that provides an overview of external supply sources, regional fuel production capacity, and a detailed description of distribution logistics infrastructure from the wharf to the refinery and downstream to retail stations.

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