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Don't Blame Just the Gas Tax for California's Pump Prices — Refineries $3 Billion more Annually Than They Should

November 23rd 2017

Oil Refinery

On Feb. 18, 2015, an explosion ripped through Exxon Mobil’s vast refinery in Torrance, forcing a shutdown that took 10% of the state’s overall gasoline production capacity offline.

Prices immediately spiked at the pump, rising by about 70 cents per gallon relative to the rest of the country. That wasn’t unexpected, given the resulting constraints in statewide gasoline supplies. What sets the Torrance outage apart from the effect of other outages, however, is what happened afterward.

Estimates of the mysterious premium being collected by the state’s refineries range from at least 20 cents per gallon — as calculated by UC Berkeley energy economist Severin Borenstein — to more than 30 cents, as reckoned by the advocacy group Consumer Watchdog. (Neither figure includes the Nov. 1 tax increase.) The lower estimate would take about $3 billion a year out of California drivers’ pockets, or about $300 a year for an average family of four; the higher estimate, $4.5 billion. Where is the money going? To refineries, whose margins increased after the explosion and have stayed high.

“There’s a debate about how much we’re getting gouged,” says Jamie Court, president of Consumer Watchdog. “But there’s no debate that we are getting gouged, or about the indifference to the gouging in Sacramento.”
How refineries' greed sank an environmental program that was saving them millions

He’s right about official indifference. Soon after the Torrance explosion, the California Energy Commission asked its Petroleum Market Advisory Committee to analyze the event’s price impacts, but didn’t give it any resources to do so.

“We had no budget and almost no staff and only met quarterly, for less than a day,” says Borenstein, who took over the committee chairmanship shortly after the explosion. “So we didn’t make much progress.” The committee was formed in December 2014 and disbanded after issuing a final report in November 2016.

The report mentioned an “unexplained differential” between prices in California and the national average that persisted even when the unique features of the state’s gasoline market were subtracted. These include “higher-than-average gasoline taxes, the higher cost of producing CARB gasoline, and programs to reduce greenhouse gas emissions (cap-and-trade and the low carbon fuel standard),” the report said. CARB, or California Air Resources Board-mandated gasoline, is a special blend formulated to reduce pollution.

Beyond those costs, the report said, Californians appeared to have paid an extra $12 billion at least since the 2015 Torrance explosion.
 
The Rand Corp. found that after the August 2012 fire at Chevron's Richmond refinery, California gas prices returned to their normal relationship with U.S. prices by that January (top); since the February 2015 Torrance explosion, they still haven't returned to normal (bottom). (Rand Corp.)

The committee advocated creating a permanent panel with a full-time staff to monitor California fuel prices, but nothing has come of it. The committee acknowledged that relatively innocent causes might be found for the premium, whether a lack of refinery competition or the costly logistics of bringing oil and fuel into the state’s markets. But “the magnitude of the loss justifies a very significant effort to diagnose its causes and remedy the situation,” the committee argued.

“If you spent $1 million or $2 million a year trying to figure out what’s going on,” Borenstein told me, “that seems to me to be money well spent, given that we’re spending $3 billion a year without finding out what’s going on.”

That’s especially true in light of the politicking over the 12-cent-per-gallon gas tax increase that kicked in Nov. 1. The tax increase was part of a package Gov. Brown signed into law April 28, aimed at raising $5.2 billion a year for repairs to roads and bridges and a host of other projects geared toward encouraging alternatives to auto travel. The package also includes a 20-cent increase in the diesel fuel tax and a hike in annual vehicle fees.

Even before the first pennies flowed out of motorists’ pockets, conservatives were mounting an attack on the tax increase. Ballot initiatives to roll it back have been filed and a recall campaign launched against freshman Sen. Josh Newman, an Orange County Democrat who voted for the package. Fueling the attack is a recent survey by UC Berkeley indicating that a majority of Californians are unhappy with the transportation plan.
 
Before the Torrance explosion, the difference between California and U.S. gas prices seldom exceeded 30 center per gallon But they've remained high since the Torrance event. (Borenstein, UC Berkeley)

The mystery price premium doesn’t seem to have raised nearly as much dudgeon. A spokeswoman for the California Energy Commission, the parent agency of Borenstein’s committee, says the commission “continues to look into the issue” but didn’t offer further details.

The refinery industry, speaking through its lobbying arm, the Western States Petroleum Assn., says there’s no mystery why California prices are higher than the U.S. average. In an emailed statement, the group’s president, Catherine Reheis-Boyd, pointed to the factors cited by the petroleum market committee “as well as our state being a fuel ‘island,’ without pipelines bringing refined petroleum products into California.”

Consumer Watchdog contends that another factor is a lack of refinery competition. Four companies — Chevron, Tesoro, Phillips 66 and Valero — control a combined 78% of statewide refining capacity; Chevron and Tesoro alone control more than half of all capacity. That may make it easier for refiners to tighten production at will, driving costs higher, as consumer advocates warned in 2013, when then-Atty. Gen. Kamala D. Harris approved the sale of BP’s Carson refinery to Tesoro. (Harris maintained that conditions she imposed on the sale would protect consumers from price pressures.)

The concentration, Court maintains, “gives oil refiners in the state a perpetual cash register, so when one has a glitch, prices go up.”
 
A possible explanation? Four companies control 78% of California refining capacity, and two companies control more than half. (Consumer Watchdog)

The Petroleum Market Advisory Committee didn’t assert that there was anything illegal about the persistently high gas prices after the Torrance explosion. But it was convinced that the extra money was going to the refineries, because their margins — that is, the difference between their cost for crude oil and the wholesale price they charge for gasoline, had “remained elevated for an unexpectedly long time” after the explosion.

The average refiner margins shot up from 62 cents per gallon the day before the explosion to $1.35 on May 14, 2015. Energy Commission statistics show that at the end of 2016 they were still at 70 cents, the highest they’ve averaged since 2007, except for the period immediately following the explosion.

WSPA representatives consistently maintained to Borenstein’s panel that the price differential compared with the national average was due to logistical constraints, such as the absence of pipelines that could bring gas supplies into California to relieve a shortage.

“They basically said this is not due to market power,” he observes. “They brought in people who frankly sounded so naive about even the possibility of a firm exercising market power that it wasn’t very credible.”

The refineries “are not disputing that the price relative to the rest of the U.S. has gone up,” Borenstein says. “That’s just arithmetic. The question is if that’s the normal operation of a market, and I would say it’s clearly not the normal operation of a market. What we don’t know is what’s the abnormality. Are they profiteering, taking advantage of a restricted supply to raise their prices? Or is some logistical constraint reducing the supply and forcing prices up?”

Torrance wasn’t the first refinery outage in California, and probably won’t be the last. Its lasting effect on prices at the pump demands close examination, but that’s not happening. Before we ponder a constitutional amendment to roll back the gas tax, which actually will fund projects good for the state, we should get to the bottom of the “Torrance tax,” which benefits no one but the refinery operators whose pockets it’s filling.


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