California Governor Gavin Newsom will sign into state law March 28 first-of-its-kind legislation authorizing fines for high gasoline prices, a proposal he heralded to punish oil companies he contends are "ripping off California families while making record profits."
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The price gouging bill cleared the state Senate in a 30-8 party-line vote March 23 and was passed by the State Assembly March 27 in a 58-19 vote in a fast-tracked process requested by the governor. It could essentially set a cap on profits for oil refiners within the state, effective 90 days after the close of the legislature's special session.
"The amount we were charged for a gallon of gasoline was higher than charged to anyone in any other state," said California state Senator Nancy Skinner, a Democrat representing the Berkeley area who introduced the bill. "Now, some of you may think, well, that's normal. It is not normal when on average that higher price was $2.61 higher than what other states pay."
US West Coast refining margins typically fetch a premium to US Gulf Coast margins for comparable crude grades owing to relatively higher refined products prices on the West Coast, S&P Global Commodity Insights data shows. For instance, the USWC coking margin for Arab Light was last seen at a $7.51/b premium to the USGC coking margin for Arab Light on March 27.
"Last year, regular grade gasoline in California was $1.50/gal higher than the rest of the country," Rob Smith, S&P Global's director of global fuel retail, said in an email March 28.
Half of that, he said, can be attributed to California's relatively higher fuel taxes and the impact of its Low Carbon Fuel Standard and cap-and-trade programs.
"Another $0.40/gal is due to the relatively higher retail station margin in California, effectively none of which are owned by oil companies," Smith continued. "Obviously, this still leaves some room to point fingers at the oil companies -- there is still $0.35/gal discrepancy after accounting for the items above -- but we should point out that California has a unique gasoline blend that cannot be easily sourced from out-of-state refineries."
Newsom convened a special session of the California legislature in December to address gasoline price spikes in the state. He initially proposed a windfall profits tax but after failing to garner support for such action, revised the measure to something more akin to a review process.
The bill, which Newsom is set to sign during a ceremony in Sacramento at 4:30 pm PDT, creates a Division of Petroleum Market Oversight within the California Energy Commission. This new independent watchdog is tasked with monitoring the state's oil market, with access to information from new data reporting requirements the bill imposes on refiners along with subpoena power that could be used to prove misconduct or price manipulation.
The commission will also initiate a rulemaking process to establish a maximum gross gasoline refining margin and set up a mechanism for penalizing in-state refiners if the price of gasoline exceeds that margin. These so-called price gouging penalties would only be imposed after an evaluation determines whether assessing a penalty would benefit consumers.
Any penalties assessed would go into a fund in the state Treasury that the state legislature could use to appropriate monies to address the consequences of price gouging, according to the bill's text.
To further hold oil companies accountable and offer greater transparency into California's oil market, the bill also gives the state more authority to enforce industry reporting requirements and investigate why the state's gasoline prices far exceed those across the rest of the country.
Height Capital Markets senior policy analyst Benjamin Salisbury, in a research note, offered that the bill could be viewed as "a hostile initiative against oil refiners/suppliers in the state, such as Chevron, Philillps66, Valero, PBF Energy and Marathon Petroleum."
"However, we emphasize that the CEC, in our opinion, is comparatively technocratic in its analysis," he said. "In our view, downshifting from a formulaic windfall profits tax to a CEC commission review represents a significant improvement in the outlook for California fuel suppliers."
Strong industry opposition
Skinner, at a March 27 hearing before the State Assembly's Utilities and Energy Committee, said the transparency measures and new data reporting requirements were intended as a deterrent against excessive pricing, and if that fell short, then the penalty would "hold Big Oil accountable to prevent future excessive profits at the expense of our hardworking California families."
Eloy Garcia, a lobbyist for the Western States Petroleum Association, argued at that same hearing that California's growing fuel supply and demand imbalance and infrastructure constraints were behind the state's gasoline price spikes, not refiners.
He contended that implementing a maximum refinery margin was "a mistake that could make a supply and demand imbalance situation worse" as "it sends a clear signal not to invest in California."
He added that the "massive" new data reporting requirements raised confidentiality concerns.
WSPA President and CEO Catherine Reheis-Boyd added in a statement March 28 that the state legislature missed an opportunity to focus on consumers and address 30 years of state "policies that caused California's unique energy isolation and higher prices."
American Fuel & Petrochemical Manufacturers similarly lamented that the effort to address California's fuel supply challenges did not touch on the state's "taxes and anti-liquid-fuel policies" that make it the most expensive place to operate a refinery in the US.
"Ignoring the role of these counterproductive policies and adding yet another tax and unprecedented regulatory burden onto fuel makers is going to further penalize in-state fuel production, undermine California's energy security and do nothing to bring relief to California drivers," AFPM said in a statement. "Add this legislative cocktail to the list of self-inflicted policy wounds for a state already bleeding people."
Salisbury said it was likely that oil and gas industry groups would challenge the measure through a veto referendum, a measure that could be added to ballots for the November 2024 elections asking voters whether to uphold or repeal the law.
"Successfully getting a veto referendum onto the ballot as well as getting it approved by voters is incredibly expensive and hard to accomplish," Salisbury said. "However, given the influence of the gas and oil industry and the success they have had in the past with this process, we are not counting them out."