Here’s why California gas prices are so high compared to other states

By Chase DiFeliciantonio, SAN FRANCISCO CHRONICLE

March 27, 2021

https://www.sfchronicle.com/local/article/Here-s-why-California-gas-prices-are-so-high-16054272.php

For many working people, 4:30 is a welcome sign that the workday is drawing to a close. But $4.30 – the price for a gallon of gas at some stations in San Francisco this week – is enough to force a double take, and raises the question: Why are gas prices so high right now?

As the Bay Area and the country slowly awaken from their pandemic-induced deep freeze, gas prices have increased as more commerce and better weather have increased demand while the price of oil has gone up. San Francisco, along with Santa Clara and Marin counties, moved to the less restrictive orange tier this week. The other feature they share is eye-popping gas prices at or near $4 per gallon.

That’s a dollar higher than the national average. And why that is may depend on whom you ask.

Some industry observers insist the higher cost of gasoline in California is due to higher taxes and regulations on gas and carbon emissions statewide. State agencies and consumer advocates insist those factors are only partly to blame and that the largest manufacturers charge more in California simply because they can, while big oil companies have held back on ramping up supply, according to the New York Times, after seeing huge cuts to their profits and workforce last year because of the pandemic.

A massive container ship blocking the critical Suez Canal could also increase the price of a variety of goods, including oil.

What is not disputed is that gas prices have soared since the beginning of the year, although they have leveled off somewhat recently. National average prices tracked by the AAA auto club are higher than they have been since May 2019. Although, again, why they’re higher is not so simple.

Crude oil prices have increased since the beginning of the year. According to the California Energy Commission, a barrel of crude went from less than $50 at the start of the year to around $65 now.

That contributes around 38 cents per gallon to gas prices and accounts for around 60% of increased prices for consumers throughout the U.S. and California, according to an email from CEC spokeswoman Lindsay Buckley.

More people driving as coronavirus restrictions have eased has also increased demand, driving up prices, Buckley said.

CEC monitoring of Bay Area bridge traffic shows drivers haven’t returned to pre-pandemic commuting rates, but car travel in the region increased more than 20% between the beginning of January and the beginning of March. “It is likely that this recent surge in driving is related to more vaccinations and continued economic recovery,” Buckley said.

So why are prices so much higher in California specifically?

“The overall differential is due largely to higher taxes and environmental fees like cap and trade and the low carbon fuel standard,” in California, said Severin Borenstein, a UC Berkeley energy economist.

Even factoring in those extra fees, Borenstein said that since 2015 Californians have paid an extra 25 to 30 cents per gallon on top of that, what he calls “the mystery gasoline surcharge.” 

That adds up to around an extra $4 billion that California residents pay annually for their gas, Borenstein said. He said the spike in prices first started in 2015 after a fire at a Southern California refinery crimped supply, but never went away.

A 2019 report from the CEC also identified the extra 30 cents-per-gallon charge, concluding, “The primary cause of the residual price increase is simply that California’s retail gasoline outlets are charging higher prices than those in other states.”

Californians do pay some of the highest gas taxes in the nation. The American Petroleum Institute lobbying group in a January report found Californians paid more than 80 cents per gallon in taxes, the most of any state, driven mostly by a state excise tax. CEC data estimated those taxes to be a few pennies less per gallon.

Pennsylvania was next on the list at 77 cents on the gallon, according to the API.

The California Department of Justice opened an investigation into the issue in 2019. The case looking at unfair and anticompetitive practices in the state’s oil industry is ongoing in San Francisco Superior Court.

High gas prices tend to hurt people who are least able to afford them.

Research by the Urban Institute has shown that higher gas prices affect working people whose household income falls below the federal poverty threshold and who tend to spend more of their income on gas. That impact is felt doubly by people at the lower end of the wage scale who have seen their employment most affected by the pandemic’s economic fallout.

For some analysts like Patrick De Haan, head of petroleum analysis at GasBuddy, a company that tracks fuel prices, the higher average prices in California are no mystery.

The state’s Low Carbon Fuel Standard, cap-and-trade system to limit emissions, and its taxes at the pump are squarely to blame for higher fuel prices, De Haan said. “The greenest policies do cost money.”

Regardless of what is driving higher prices in the Golden State, economics still plays a role. Typically when demand and prices increase, producers ramp up production to meet it, which causes prices to fall.

Production is increasing, Borenstein said. But with the hit taken by the oil industry last year – oil prices briefly went negative as the pandemic slashed demand, cratering gas prices – bringing capacity back online is not as simple as flipping a switch, De Haan said.

Big oil companies “are being very slow and cautious in terms of ramping up production,” should the virus spiral out of control and drive demand back down again, De Haan said.

That caution on the part of oil executives is calibrated to keep prices where they are by restricting production, at least in the U.S., according to the New York Times.

“The industry is getting ready for people to go back out and the economy to open up but it’s not producing more crude oil,” said Jamie Court, president of the progressive nonprofit Consumer Watchdog.

Because Californians pay more for gas on average, when prices go up, “we get a double whammy,” Court said.