California Has a Gas-Price Mystery: Too High, but Why?
5:30 am ET January 20, 2023 Editor's Picks Print
By Jinjoo Lee
Why do California’s drivers pay so much for gas?
California’s retail gas price was $4.32 a gallon in December 2022, while it was $3.09 a gallon on average elsewhere in the U.S. That is a $1.23-per-gallon difference. There are some quantifiable sources of the California premium. Higher state gas taxes are one reason. The state’s clean air policies are another. These include a cap-and-trade program for greenhouse-gas emissions, a low-carbon fuel standard and a fee for the abatement of leaking underground storage. California also mandates a cleaner-burning gasoline, which adds around 10 cents a gallon.
Tally all of those California-specific costs up, though, and it comes out to about $1.09 a gallon, or 80 cents more than what the average state gas tax is elsewhere in the U.S., according to calculations by Prof. Severin Borenstein at the University of California Berkeley’s Haas School of Business, based on the monthly average for December 2022. But that still leaves a 43-cents-per-gallon difference not explained by California-specific tax and air policy-related costs. Mr. Borenstein was a member of a committee that the California Energy Commission assembled in 2014 to better understand fuel-price fluctuations.
explosion occurred The premium surfaced after an explosion occurred at a Torrance, Calif. refinery in February 2015. While a disruption like that could cause a temporary spike, it has lasted long after the refinery restarted in 2016. In all, Mr. Borenstein estimates that what he calls a “mystery gasoline surcharge” has cost California’s drivers almost $50 billion in eight years.
Who is capturing those profits? It doesn’t appear to be refineries–at least not directly. The price differential between California’s spot wholesale gasoline and the dirtier fuel used elsewhere in the U.S. has been fairly consistent before and after the Torrance refinery fire. That means the surcharge shows up between the refineries and consumers’ gas tanks.
One important aspect to consider: There is less competition among California’s retail fuel stations compared to other states. Elsewhere they typically have razor-thin margins on fuel and make up for it by selling things like coffee and lottery tickets. California has twice as many drivers per gas station as the rest of the country, according to an analysis presented by transportation-fuels consulting firm Stillwater Associates to the California Energy Commission in November. While the number of licensed drivers in California grew 14% between 2010 to 2020, the number of stations only grew 5%. True, Californians drive more electric vehicles than any other state but, as of 2021, they accounted for only 1.6% of total vehicle registrations there.
Fuel margins at California’s gas stations were about 79 cents a gallon on average in 2022, 79% higher than the 44 cents-a-gallon nationwide average, according to data from Oil Price Information Service, an energy data firm that is part of Dow Jones & Co., publisher of The Wall Street Journal. In Texas, where the margin was the thinnest, it was 26 cents a gallon. OPIS tracks the difference between the average price retailers charged for gasoline at their station and the price a refiner or distributor charges at the distribution point, known as the rack price.
That isn’t to say all retail gas stations are collecting rich margins. What is unique about California is that a large share of its gas stations are still owned by refiners or have long-term contracts that give refiners significant control over fuel prices, according to Prof. Borenstein. In that so-called dealer system, a branded station with a long-term contract is locked into buying their gasoline from a specific supplier—say, Chevron, Shell or Valero—and can’t shop around if prices look more attractive at the rack. That is to say, some of that big California premium could be going back to those oil companies and refiners, too. Tom Kloza, global head of energy analysis at OPIS, said that while his firm can track prices at the racks, there is little visibility on what price refiners or oil companies charge to fuel stations with which they have long-term contracts.
point toward a faster transition Why wouldn’t fat margins attract more new gas stations? Part of it could be that California’s state-level policies all followed suit point toward a faster transition away from gasoline. Opening a new gas station looks unappetizing, and some cities aren’t even allowing it. Petaluma enacted a ban in March 2021 and a handful of other cities have followed suit. Alessandra Magnasco, a policy manager for the California Fuels & Convenience Alliance, a trade group, says the cost of doing business is simply higher in California, citing higher electricity prices, wages and permitting costs. But those factors existed before the Torrance explosion, making it difficult to tie it to the California premium. Prof. Borenstein notes that there needs to be an investigation into how much cost these regulations impose and how many gas stations have been forced to shut down because of them.
Gov. Gavin Newsom has proposed a “price-gouging penalty” on what he says are oil companies’ excess profits. Politicians blaming high pump prices, but not low ones, on “Big Oil” is nothing unique. But California’s leaders may be right in this case. They also should look in the mirror and consider the burden of regulation. Oil companies and retail gas stations may well be taking large profits, but the blame can’t be entirely on the companies if policies deter competition. Mr. Newsom’s other proposal–expanding California agencies’ ability to investigate the cause of pricing irregularities–seems like an important step if it helps the state identify exactly where California’s gas premium goes and why.
Ironically, California’s gas price premium illustrates that, far from punishing the fossil fuel industry, a rapid shift can be a bonanza for gas stations and refiners that stick around. As Mr. Kloza puts it, “it’s a sunset industry, but it’s going to be a beautiful sunset.”
jinjoo.lee@wsj.com Write to Jinjoo Lee at jinjoo.lee@wsj.com
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