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?
- 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 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.