The Missing Billions Spent On Gasoline In California Each Year

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The Missing Billions Spent On Gasoline In California Each Year


April 8, 2018

California drivers already pay more for gasoline than motorists in just about every other state.

But even after taking into account state gas taxes, blending requirements aimed at reducing air pollution and other environmental and climate fees attached to each gallon of fuel, it appears drivers in the Golden State pay a lot more than they should.

UC Berkeley professor Severin Borenstein calls the price differential “California’s mystery gasoline surcharge” that roughly translates into a premium of 20 to 30 cents on every gallon pumped in the state.

And that’s not chump change when one considers Californians consume 40 million gallons a day. Multiply that over an entire year and Borenstein says that comes to between $3 billion to $4 billion that is unaccounted.

And here’s the kicker: A state committee that looked into the price discrepancy and turned in its report to the California Energy Commission last fall did not come up with a firm explanation.

“I don’t know why it is,” said Borenstein, who was the chairman of the Petroleum Market Advisory Committee, which was made up of five members from the public and private sectors.

Theories range from suspicions about gasoline refiners and marketers to criticisms that the state’s regulatory burdens have made California unfriendly to business but Borenstein says they are just that — theories.

Borenstein is calling for the formation of a commission to find the exact reasons for the price differential.

“Somebody should keep looking at this,” he said.

The story has taken on a bit more urgency now that gasoline prices are trending back up. The average price of regular reached $3.50 a gallon in California this week, the highest since August 2015.

What happened?

Californians get hit hard at the gas pump. In addition to the 18.4 cents per gallon they pay in federal taxes, drivers also pay more than most when it comes to state gas taxes. Besides excise taxes, drivers pay for cleaner-burning gasoline that costs about 10 cents a gallon to make.

Then there’s the state’s cap and trade program that adds, in its most recent iteration, about 12 cents a gallon. California also has a Low Carbon Fuel Standard that adds about 7 cents a gallon.

Between 2000 and 2014, the price difference between California and the rest of the U.S. in real dollars moved in one direction or the other. Sometimes the excess price difference was positive and sometimes it was negative, generally in a range of about 20 cents.

In February 2015, an explosion occurred at a refinery in Torrance — one of the biggest in the state. The plant’s outage caused gasoline prices in Southern California to jump as high as $1.50 above the national average.

But even after the refinery came back online, the surcharge remained in positive territory and in every month since then, Californians have paid a premium at the pump.

“There is no year prior to 2015 in which we didn’t have at least one month with a negative gasoline surcharge and now we’ve gone three years without such a month,” said Borenstein, professor of Business Administration and Public Policy at the Haas School of Business

The mystery surcharge was as low as 11 cents a gallon at the end of 2016 and has popped up to 30 cents more than can be accounted for. But the figure has never dipped into negative territory since the Torrance explosion.

The Petroleum Market Advisory Committee (PMAC) tried to figure out why but by the time the committee closed shop in September 2017, its members could not come up with any clear reasons.

The PMAC said it didn’t have the staffing and financial resources to reach specific conclusions — as well as the inability to compel participation from decision-makers in the fuel industry.

The committee was also bound by California’s Bagley-Keene open meetings rules that restricted members to meet only when they were physically in one location. That, the committee said in its final report, limited the number of meetings to a quarterly basis because the five members lived in different parts of the state.

Possible explanations

Is the differential due to California’s narrow gasoline market or market manipulation? It’s a question that has been raised before in state hearings and investigations but the answers have been inconclusive.

The oil refinery industry has consolidated in recent years, leaving the California market in the hands of just a few companies. Tesoro and Chevron have been estimated to make up nearly half of the state’s refining capacity

Santa Monica-based Consumer Watchdog told the PMAC in 2016 the oil industry is to blame for the price premium.

The “inside information” refiners “know about each others’ supplies and prices allow them to rig the market to keep gas supplies low, prices high, and drive out competition,” Jamie Court, president of Consumer Watchdog, said during a presentation.

But one of the committee’s members, David Hackett, president of Stillwater Associates, a transportation energy consulting company in Irvine, sees potential explanations that are less sinister.

“I think it is a whole bunch of little things that have restricted competition,” Hackett said in a telephone interview. “There’s not much competition at the pump in California these days as there used to be, or as there is in other parts of the country.”

Some of the major oil companies such as ExxonMobil and Shell have divested themselves from retail gas stations in recent years. Their brand is still used but they don’t physically own the stations anymore.

“I know 20 years ago when I worked for Mobil we realized gas stations weren’t making any money and we scraped them and sold the land,” Hackett said. “What had been a Mobil station is now a Starbucks, for example.”

The number of public retail gasoline stations in California between 1996 and 2012 decreased from just over 14,000 to 10,100, according to figures from the National Petroleum News.

But data compiled from the California Energy Commission between 2009 and 2016 broke down the numbers by fuel type — such as gasoline, propane and diesel — and showed the number of gas stations fluctuating between 6,329 in 2014 to 8,456 in 2016.

Hackett also pointed to government rules, such as limits imposed by the South Coast Air Management District restricting how much gasoline a station can pump monthly or in a given year, out of concern for the amount of air pollution generated.

That, Hackett said, really hurts low-priced gas stations like Costco who have to interrupt service. And that may account for the overall higher price Californians pay, as well as contributing to a reluctance of some fuel companies coming into the state.

“There are aggressive brands that are growing their businesses outside of California (but) they won’t come to California because California is a such a difficult place to do business they don’t want to put up with it,” Hackett said.

However, Hackett emphasized his explanations represent his opinion.

Borenstein said, “I have tremendous respect for Dave” but questioned why things “suddenly changed in 2015.”

He also said he would not rule out Consumer Watchdog’s explanation, either, or imply that California gasoline producers are acting anti-competitively.

“All of these are possible but right now they’re just theories,” Borenstein said. “If we’re actually going to find out what the problems is and address it, we’re going to have to go beyond people speculating … We need a lot more information.”

What next?

Borenstein wants to form a commission to dig into the problem.

The California Attorney General’s Office, Borenstein said, could be a logical place.

“It’s not under Bagley-Keene, it’s well-financed, they actually hire economic experts and they sink real resources into investigating,” Borenstein said. “They have some power to compel testimony or at least get answers” the Petroleum Market Advisory Commission was not able to get.

When asked if the AG’s office is considering launching such a commission, the department’s press office said in an email to the Union-Tribune, “To protect its integrity, we can’t comment on, even to confirm or deny, a potential or ongoing investigation.”

The Sacramento-based Western States Petroleum Association declined requests from the Union-Tribune to comment on whether it would support or oppose the formation of a commission. The trade group also passed on responding to accusations by Consumer Watchdog that the oil industry is responsible for the price differential.

Borenstein said he was not sure how much it would cost to establish a commission.

“It would definitely be in the millions of dollars,” he said. “I doubt it would be in the tens of millions.”

On the other hand, Borenstein said, the surcharge is estimated to be costing California motorists $12 million a day.

“So even if (the commission) cost $20 million or $30 million, which would be a huge amount of money for an investigation like this, it’s still pretty minor compared to what we’re paying.”

Consumer Watchdog
Consumer Watchdog
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