California’s Gasoline Price Blowout Is A Problem Of Its Own Making

First leverage your ignorance of economic forces to create a problem. Next send taxpayers checks funded by their own taxes to paper over the problem. Then hope that voters are too dumb to understand that your “solution” to the problem will only compound it so they’ll re-elect you.

That appears to be the strategy being employed by California Governor Gavin Newsom today as it relates to the state’s extraordinarily high prices for gasoline at the pump. California’s gas prices always run higher than the national average due to all the added taxes and fees the state tacks onto the price for each gallon of gas. But those taxes and fees (totalling about $1.14 a gallon) don’t explain the disparity between the average price of gas in California — nearly $6.29 a gallon — and the national average, which today stands at $3.92 according to AAA, and just $3.34/gal in Florida despite supply disruptions from Hurricane Ian.

Though gas prices have jumped everywhere in the last month, up 21 cents on average (thanks OPEC+), they have surged in California, up $1.22 over the same period. Obviously, there is more at play here than just the rising price for crude oil working its way into the gasoline price.

Who’s Really to Blame Here?

Governor Newsom has tried to lay blame at the feet of the state’s oil refineries, four of which were down for scheduled maintenance recently at the same time. But these refineries are not allowed to coordinate in any way due to the nation’s anti-trust laws. Severin Borenstein, a UC Berkeley energy economist, pointed out that “They definitely cannot talk to each other about their production time. That would be a pretty clear antitrust violation.”

Ed Hirs, an energy fellow at the University of Houston, pointed to the state’s shortage of refinery capacity as a real cause of the problem. “The real issue is you’ve lost several hundred thousand barrels a day of refining capacity,” Hirs said. “And to make up that supply, people are having to shift supplies from other parts of the nation, and that just costs money.”

Amy Myers Jaffe, the managing director of Tufts University Climate Policy Lab, said that it is key to ensure the needed infrastructure for gasoline alternatives is in place before invoking policies that result in destroying the old infrastructure. She then appeared to scold Newsom for his attempt at blame-shifting, saying “The way we’re doing it now is you just let the fuel costs go up and then we leave poor people with no ability to get anywhere… . And then [California leaders] grandstand against the oil companies — that’s not a solution.”

Newsom’s solutions don’t solve anything. The governor this year signed a bill that has already started sending out stimulus checks to 23 million Californians — ostensibly to offset higher fuel prices. Nevermind that Economics 101 teaches us that giving people more free money to spend on gasoline is only going to lead to demand, and price, increases.

Refining Capacity Shortage Explained

In an email, the Institute for Energy Research (IER) points to Newsom’s own energy-related policies, designed to punish refiners and producers of oil and gas, as the culprits who have produced the state’s lack of refining capacity. “California refineries, similar to U.S. refineries, have been closing due to an onerous regulatory environment, rich inducements to switch to biofuels and to demand destruction due to COVID lockdowns.”

In response to the blowout in gas prices, Gov. Newsom recently authorized refiners to switch over from producing summer blends of gasoline to less-costly winter blends. That move that might normally be helpful; California requires a unique blend of anti-smog gasoline, made only in California. Dropping that requirement could enable shipments of gasoline from the rest of the country. But it doesn’t resolve the biggest problem, a shortage of refining capacity.

Almost incredibly, the Governor’s other major action has been to call for a special session of the California legislature in December to consider passing yet another new tax on the oil and gas industry, a windfall profits tax. In response to that move by Newsom, officials at refining company Valero said, correctly, that such a tax “will only further strain the fuel market and adversely impact refiners and ultimately those costs will pass to California consumers.”

A Problem, or a Success Case?

It is entirely fair to note that the closure of much of the state’s refining capacity in recent years is in fact an overtly intentional outcome of Newsom’s own policies. It is in fact a success case in his view and the views of his regulators. The economic impacts of forcing those closures too early and creating the current shortage of refining capacity were entirely predictable, and were in fact warned about by experts within and outside of the industry for years.

For those living outside of California, observing what is taking place there is a bit of a frightening prospect given that it is a state whose bad ideas about energy policy so often serve as a germinating point that creates a spreading to other states. In fact, no fewer than 17 other states have laws on the books that force their own policymakers to adopt any vehicle emissions standards invoked by California’s government.

There is also the disturbing reality that Gov. Newsom has made no secret of his intentions to run for the presidency as soon as 2024, thus creating the potential for similar policies and inevitable outcomes experienced by Californians today becoming a national nightmare in the years to come.

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