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California’s Mystery Gasoline Surcharge Continues

It’s time for lawmakers to make the $3 billion per year puzzle a priority.

It’s not going away. Back in October, I blogged, and published an op-ed about California’s mystery gasoline surcharge. In case you instead chose to fill up those memory cells with the plotline from The Walking Dead, here’s a refresher: The state’s Petroleum Market Advisory Committee in its final report last September voiced deep concern about the abnormally high price premium that California drivers have been paying since early 2015. But, the PMAC (which I chaired) concluded that it did not have the authority or resources to do a full investigation of the cause.


The response of a few legislators and other policymakers was roughly, “huh, someone should look into that.” But since then, the topic has disappeared from the news and the halls of the Capitol. That got me thinking about whether this is just small potatoes — not enough money to rise towards the top of public policy priorities — or a hot potato that policymakers just don’t want to touch.

To jog your memory, the chart below shows the difference between California’s gasoline price and the average price in the rest of the U.S. after adjusting (month by month) for the differentials in taxes and environmental fees (including our cap and trade program and low carbon fuel standard), and the higher cost of producing California’s cleaner burning gasoline. (The data and the calculations are in a spreadsheet here.)

From 2000 until the Torrance refinery fire in early 2015, California’s price differential from the rest of the country went up and down, but on average there was no premium above what you would expect from tax differences and those other costs. That changed drastically in February 2015, and three years later it has not returned to the normal relationship of the previous 15 years. The price premium in 2015 was the worst, but 2017 was still more than twice as large as any year prior to 2015.

The extra payments since February 2015 have cost California drivers about $15 billion. And if the differential continues at its current level, which shows no sign of abating, it will cost Californians about $3 billion in 2018. Is that small potatoes?

For comparison:

  • The gas tax increase that went into effect last November – leading to protests, a recall effort against one state senator and likely a ballot initiative to repeal the increase — will cost California drivers a little under $2 billion this year. And that money will go to fixing roads.
  • The state’s entire revenue take from the cap-and-trade program will be about $3 billion this year.
  • All the natural gas that California households will use for home heating, cooking, and hot water will cost them about $5 billion this year.
  • The state government’s entire contribution to the University of California will be about $3 billion this year.

So, it’s hard to see how $3 billion disappearing into the gasoline supply chain – about $300 for a typical California family of 4 — is small potatoes, even in the context of statewide expenditures.

As the PMAC’s final report pointed out, the persistent differential does not necessarily mean that California gasoline producers are acting anti-competitively. The PMAC heard from some industry participants who said that logistical and regulatory barriers to importing gasoline had increased substantially in the previous few years. Impediments to importing gasoline mean that when an in-state refiner has a hiccup, the supply from outside the state can’t quickly meet the resulting shortage.

Unfortunately, such tight markets, particularly for products for which consumers are not very price-sensitive, also put sellers in a better position to exacerbate price spikes by reducing supply. From the outside, it’s not easy to tell if a price spike is primarily due to logistical/regulatory frictions or to sellers intentionally restricting supply. Whichever is the cause, the problem shows no signs of going away. The final numbers aren’t in for February yet, but so far the premium is on track to be back above 20 cents per gallon.

And, if anything, we are likely to need more of those imports in the future, because California consumption is on the rise.  It bottomed out in 2012 and has gone up every year since. Maybe electric cars will turn that around in a few years, after we have paid another $10 or $20 billion to feed the mystery surcharge.

What should California do about the mystery surcharge? First, set up a commission with real resources to investigate the cause. Give them the funding necessary to hire (or borrow from other parts of state government) the very best experts in the oil and gasoline supply chain, and in market economics and competition policy. Then give them the authority to examine all the confidential data from companies that city, county and state offices collect.  And compel the executives at those companies to meet with this commission – not the trade association representatives or outside consultants they sent to PMAC meetings — and answer questions, behind closed doors if necessary to protect confidential or competitively-sensitive information.

Every firm in California’s gasoline supply chain must get permits to operate in the state. Those permits allow companies to do business in the state, but require them to do so responsibly. Accepting a permit should also oblige companies to responsibly cooperate when something goes wrong in the market.

Since 2015, something has gone multi-billion-dollars wrong in California’s gasoline market. It would be reassuring if lawmakers would show as much enthusiasm for uncovering the cause as they have for protesting tax increases or spending cap-and-trade revenues.

I’m still tweeting energy articles/research/opinions that grab me @BorensteinS

Severin Borenstein View All

Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.

12 thoughts on “California’s Mystery Gasoline Surcharge Continues Leave a comment

  1. From the graphs there’s an obvious seasonality to the price/cost of gasoline in California. Maybe that’s part of the answer? If you take lut he spikes at the start of each year the disparity isn’t so great. You may also want to look at the full weighted cost of all of the refined products and compare that to the US average. It may be that CA refineries are set up to optimize total revenues differently than “average” Us refineries. It should be possible to get the data without any formal inquiry. Year’s ago Platt’s used to provide the relevant data.

  2. Fascinating. Although it makes sense that CA “institutions” result in a price premium, the Torrance discontinuity seems to contradict a long-standing or gradual arrival of such a gap. If there’s a cartel somewhere in the supply chain, then it should be traceable (with enough time/money/staffing) and thus punishable (anti-Trust). If not, then perhaps Californians are paying “the cost of doing business…”

  3. Any thoughts about what we can do to increase supply? Seems at some point if we push supply high enough the price has to come down.

  4. One thing that is missing from this, as I see it, is the capacity utilization of California refineries. If they are running at capacity, and at the margin, imports must come from the few out-of-state refineries that can produce California-spec fuel, then perhaps we have an explanation (high cost of transporting refined products). The alternative would be adding capacity in California, a long-run marginal cost that would be significant.

    If, on the other hand, there is idle capacity at California refineries, we would expect the opposite — bidding down the price based on short-term incurred costs to increase output.

    Markets in equilibrium have short-run marginal costs (importing fuel from afar) and long-run marginal costs (adding capacity) at equal levels. This is why electricity (where we intentionally maintain a reserve margin that a competitive market would not maintain) needs to be regulated based on long-run marginal costs. We intentionally depress the short-run costs, but if consumption rises, we incur long-run costs, because we STILL want to maintain that reserve at the higher consumption level.

    Set up a Commission? Gee .. I think we have one of those for electricity, and California still pays about a 40% premium in electricity prices over the national average.

    Indeed: if the in-state market is tight, as happened for electricity in 2000-2001, then individual producers have market power, as Enron tried to exercise then. Perhaps the “Commission” could investigate whether imports are unduly restricted.

    During the power crisis of 2000-2001, at least one California refinery did ramp down, because the value of its NOX allowances was so high that the transport costs from available out-of-California refineries, and sale of the NOX allowances into the power generation market, was a better choice. Today, while imported fuel pays the carbon price on the carbon content of the imported fuel, imported fuel does NOT have an embedded carbon price of the carbon used to refine the fuel; this may be giving imports a cost advantage that should perhaps be studied.

    During the power crisis, the state tried to support development of additional reserve capacity. Once the triggering events eased — the drought ended and the pipeline was repaired — the result was market clearing prices far below an equilibrium (SRMC = LRIC) level.

    Hawaii tried regulating gasoline prices for a time, through their state PUC. With only two refineries, they felt that market power was concentrated. It turned out to be a largely fruitless effort; the Commission had nowhere near the technical expertise to determine if a restriction in refinery output was for an unavoidable technical reason or a market reason.

    Without a sense of the market equilibrium, it’s impossible to have an opinion on whether there is something fishy in the market, or something working as it should in the market..

    • Hi Jim:

      THanks for your comments. Some responses:

      1. Refineries can easily be “at capacity” and still be withholding supply from the California market by producing a different mix of products, not squeezing out as much CARB gasoline as they could, and sending more non-CARB gasoline to Nevada and Arizona. Detecting market power versus true scarcity is quite challenging.

      2. Most of the imports come from other countries, not other parts of the US. There is a large and very price-responsive supply. Or at least there was prior to February 2015. No one is suggesting that a refinery should be required to make capital investments to increase their output, particularly as California is also telling them that we will soon be using much less gasoline as we expand EVs, though whether that comes true or not is an open question.

      3. Geez, yes, California does have a commission for electricity and does have much higher electricity rates than the rest of the country. Geez, all those other states that have much lower electricity rates also have commissions for electricity. What exactly was your point?

      4. We don’t need to a major study to do a calculation of the effect of California’s carbon price on the relative costs of refining in-state and out-of-state. All we need to do is measure the carbon emissions associated with refining, which has been done and they are a very small share of the emissions from burning the gasoline. The cost advantage of out of state refiners from this difference could be as much as two cents per gallon. But wait! We already had that discussion and as a result in-state refiners get free permits based on their output of refined product in order to offset that cost difference.

      5. No one is suggesting regulating gasoline prices. That sort of hyperbolic response to a suggestion that a change in the market deserve scrutiny is unhelpful.

      6. Yes, without a sense of market equilibrium, it is hard to know if the mystery surcharge is due to nefarious activities or due to some institutional friction. Or some other effect. But with California drivers spending an extra $3 billion per year, it seems it would be worth having someone take a serious look into that. It is not a trivial exercise, as I learned from more than two decades of research on the oil/gasoline industry and three years on the PMAC.


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