The Mystery Lurking In California’s $8 Gas Prices

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The Golden State has a ‘mystery gas surcharge.’ Some say it’s price gouging.

By Shannon Osaka, the Washington Post

October 15, 2022


Eight dollars for a gallon of gas. Once, it seemed like an impossibility; now, it seems to happen in California every time there is a price spike. Last week, a Chevron station in Los Angeles recorded prices of $8.35 and above; similar prices were reported at multiple stations around Southern California.

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But some analysts say the most recent spike in California prices — the average price per gallon across the state as of Tuesday was $6.29 — is only part of a much longer, and potentially more destructive, trend. For the past seven years, California consumers have suffered through what one economist calls a “mystery gasoline surcharge.” That is, California gas prices are significantly higher than in the rest of the nation — and the price premium can’t be explained by state taxes and environmental regulations alone.

Severin Borenstein, a professor of business and public policy at the University of California at Berkeley, first noticed the separation between the state’s gas prices and the rest of the nation in 2015. An ExxonMobil oil refinery operating in Torrance, Calif., had just exploded, and the interruption to gasoline refining explained the temporarily higher prices. But over the following months and years, Borenstein says, the difference never disappeared as he expected.

“It went up, and it never came down again,” he said.

California does have additional taxes and fees from environmental regulations that other states don’t have. The state’s low carbon fuels standard, for example, adds $0.08 to every gallon of gas. California gas taxes add another $0.17. But Borenstein’s data shows that, all told, California-specific taxes and regulations only account for around $0.83. In September, however, the average Californian was paying $1.57 more for gas than the average American, leaving a large “unexplained” surcharge. That’s a big gap — and in October, it could get even bigger.

So what’s behind the extra prices that Californians are paying? There are a few theories.

First, California uses its own special gas blend that lessens air pollution.(Other heavily populated metro areas around the country also have special blends, but California’s is more restrictive.) California is also what some call a “petroleum island” — there are no pipelines bringing refined oil into the state. That means that for the most part, gas stations across the state have to get their gasoline from one of the five major refiners that provide 96 percent of California’s gasoline: Chevron, Marathon, PBF Energy, Phillips 66 and Valero.

Oil companies say this means that if there are any disruptions to the refining process or to the incoming supply of crude oil, prices can easily spike.

Borenstein says oil refiners’ power in the market could allow them to set higher prices. He points out that while the spot price of gasoline in California — the price at which refiners sell their oil on the open market — is only 10 to 15 cents higher than the national average, refiners can sell their oil to branded gasoline stations — which make up the large majority of stations in California — for higher prices. The California surcharge, he said, “is very likely related to the fact that there are a small number of very powerful branded refiners that can take advantage of their market share.”

Jamie Court, the president of the nonprofit Consumer Watchdog, goes further. “I don’t call it a ‘mystery surcharge’ — I know what’s happened to the market,” he said. “We’ve allowed consolidation.” Because branded stations are locked into contracts with the refiners, Court says, refiners can set high minimum prices that stations have to follow. He cites a report from his organization, drawn from SEC filings data, that argues that refiners have been making record profits over the past year or so.

But there could be other factors as well. Borenstein says the state should order an investigation into the surcharge to find out whether the contracts between refiners and retailers are actually the culprit; alternatively, he says, refiners could share their data if they want to prove environmental regulations are costing them more than estimated. “I posted my spreadsheet online and said, ‘Okay, show me yours,’ ” Borenstein said.

Kevin Slagle, the vice president of strategic communications for the Western States Petroleum Association, says the higher prices are caused by California’s specific fuel blend and regulatory requirements. Any disruptions to supply, he says, have knock-on effects for prices since refining capacity is so tight. “Let’s not forget that state policy in California is focused on eliminating refining and production in the state,” he said via email.

Even California Governor Gavin Newsom (D) has recently stepped into the debate, saying on Friday that he would call for a special session of the legislature in December to pass a “windfall tax” on refiner profits. “This degree of divergence from national prices has never happened before,” the governor said in a speech. “Their record profits are coming at your expense.”

Whatever the cause, Borenstein says some form of investigation would be worthwhile. Since 2015, he estimates, the mystery surcharge has cost California consumers around $20 billion.

Consumer Watchdog
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