As Californians look down the barrel of gasoline prices just cents away from hitting another all-time record, Gov. Gavin Newsom is quick to blame the oil industry for “ripping you off.” But even as Sacramento considers levying a punitive tax on oil companies, experts say state regulators have woefully little insight into an industry that zealously guards information on pricing and operations as confidential trade secrets.
Gas prices in California reached $6.41 a gallon on Tuesday – a dizzying 96-cent increase over the past two weeks – according to AAA. But the California Energy Commission, the state’s main energy policy body, can’t fully explain what is behind the punishing hike.
“I wouldn’t even call it flying blind,” Severin Borenstein an energy economist at UC Berkeley, said of the commission. “Everybody scrambles to say, ‘Well, we should do something about this.’ And then the price goes back down and they and everybody go back to ignoring it.”
Newsom’s call for a “windfall profits tax” on oil companies last week comes amid a new wrinkle in Golden State drivers’ long-standing misery at the pump.
While fuel prices in California are historically higher than the nation – in large part due to the state’s taxes and environmental regulations – the price differential between California and the rest of the country has exploded to $2.60 a gallon. That is the highest price gap ever.
To take one comparison: Florida, which was racked by Hurricane Ian last week, has average gas prices that are $3.23 cheaper per gallon than California, according to AAA.
It’s a problem that may only get worse.
As the state transitions away from fossil fuels in the coming years, oil refineries are closing down. That leaves drivers who lack an electric vehicle reliant on a dwindling industry that is increasingly concentrated among a handful of companies and prone to price swings. The most recent price spike only underscores the state’s shaky grasp on the oil-to-gasoline supply chain as Newsom looks to phase out most gas-powered cars by 2035, experts say.
“The long-term problem remains the same. How do you treat an industry that you want to put out of business?” said Tom Kloza, an analyst with OPIS, the Oil Price Information Service. “How do you do that without alienating your constituents with $10 gas prices?”
Through publicly available information, energy analysts know that the recent price spike is tied to reduced gas production among the state’s oil refiners, which include Marathon Petroleum, Chevron, and PBF Energy. The limited supply and strong fuel demand is causing gas prices on the commodity market to surge well above the normal gap between California and the rest of the country.
But what’s behind that drop in production is a bigger mystery. Some of the reduced gas flow is due to an unplanned refinery outage in September and infrastructure maintenance that brings capacity offline, according to the California Energy Commission. Still, historically, price hikes of this magnitude are typically brought on by refinery catastrophes — and there have been none of those.
That has left the state’s Energy Commission staff, who are tasked with providing a window into the state’s oil industry, scratching their heads.
“The only thing you could point to are these very minor refinery repairs, which don’t explain it,” said CEC Commissioner David Hochschild.
The lack of transparency is extreme enough that Hochschild turned to oil companies last week asking them to volunteer a basic explanation of the problem. In a letter addressed to major gas producers, he also asked the companies to detail why they allowed their fuel reserves to dwindle, even though the industry typically beefs up reserves ahead of planned maintenance to prevent price shocks. “We wouldn’t be asking for this information if we had it already,” said Hochschild. “We’re doing the best we can with the information we have.”
Borenstein, who has been researching the state’s perplexing gasoline industry for years, said the letter highlights a longstanding complaint of his: The California Energy Commission is ill-equipped to provide oversight of the oil industry.
“They are data collectors, and they can be very valuable inputs about industry practices and operations,” he said. “But ultimately the state needs a set of economists and market analysts who really understand the dynamics in the market.”
The oil industry’s inner mechanics have long been shrouded in secrecy not just in California. It’s a level of confidentiality that has given rise to an entire industry of trade publications, including OPIS, that work to pry out information often based on anonymous sources and sell those details to commodities traders.
Oil companies treat their operations “like a trade secret on the order of the riddle of the Sphinx or the nuclear codes,” said Kloza, the OPIS analyst. Kloza said there is often good reason for the secrecy – oil companies are always on guard against commodities traders looking to capitalize on gasoline supply constraints and make “a pretty penny.”
California’s main oil refiners did not respond to requests for detailed comments.
But Kara Greene, a spokesperson for Western States Petroleum Association, an oil industry trade group, pushed back on contentions that oil companies keep information from regulators. “In times like this they are on daily, sometimes hourly communications, with the California Energy Commission,” she said.Related Articles
Even so, Greene said the oil industry needs to protect “business sensitive information” just as Apple seeks to safeguard iPhone technology.
Hochschild and Borenstein said the price spike raises concerns of illegal market manipulation, although both said there is currently no evidence to support that concern.
Next year, regulators will have one more oversight tool. Under SB 1322, which Newsom recently signed into law, oil companies will be required to provide the public with a more detailed breakdown of their profit margins on the gasoline they sell every month in California.
But the legislation, which goes into effect in January, will come too late for drivers seeking a deeper understanding of how gas prices went haywire this month, said Jamie Court, president of the advocacy group Consumer Watchdog.
“We won’t know what they’re making now,” he said. “It’s a black box inside a black box.”
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