This year, it will drain over $3 billion from the pockets of Californians. We need to find out why.
I have written before on this blog about the mystery surcharge, the extra amount we pay for gas that can’t be explained by higher taxes and producer costs. I figured that some public spirited lawmaker in Sacramento would want to dig into this with the potential of saving Californians billions of dollars. So far, not much luck, but I remain ever hopeful.
Today, I want to drill down further on the surcharge, while recognizing that a full accounting for it will require much more time, money, and effort than I can devote to it on my own.
The Gap Between California and Other States
To review the basics, so far this year California’s gas price has been about 80 cents a gallon above the average of all other states. Part of that difference is due to higher taxes. And part is our cleaner-burning fuel – adopted in 1996 to cut unhealthy smog – which costs more to make. But there’s also a mystery surcharge on California gas: In the past few years, the price gap with other states has jumped much more than costs and taxes can explain.
Higher state gas taxes account for about 23 cents of the gap. That part is emphasized by advocates of Proposition 6, the initiative that if it passes in November would roll back last year’s 12-cent gas tax increase. An additional 3 cents on average is due to local sales taxes, which vary by county.
Then there are the fees to address environmental impacts, both climate change and local pollution. The state’s cap-and-trade program on greenhouse gases has added 12 cents a gallon this year, and our “low carbon fuel standard” has pushed the price up by about 8 cents. Most analysts think that producing our smog-reducing gasoline formulation costs no more than 10 cents extra. By the way, it is also one reason you can now see the mountains from downtown Los Angeles. Finally, we pay 2 cents to clean up old gas station sites where fuel leaked into the soil.
When you add up those taxes, fees and extra production costs, Californians are paying about 58 cents a gallon more than the average American. That’s real money considering that we use about 1 gallon of gasoline per person per day.
Still, most of that 58 cents buys us some real benefits: It goes to repairing roads and bridges, building needed new infrastructure for our rapidly expanding economy, reducing local air pollution, fighting climate change, and helping low-income California families afford energy. Yes, a bit of it goes to more controversial projects such as high-speed rail (about 3 cents), but the majority pays for bread-and-butter public services that we use every day.
The Mystery Surcharge Arrival
That leaves the mystery surcharge, which has been about 22 cents a gallon this year. That surcharge – above the difference in taxes, fees, and production costs – averaged 2 cents from 2000 to 2014 and was never more than 12 cents in any of those years. But everything changed in 2015.
As chair of the Petroleum Market Advisory Committee to the California Energy Commission, I watched gas prices skyrocket after a refinery explosion in Torrance in February 2015. The committee expected tighter supply to drive up prices, as it had done after previous refinery accidents. But we also expected prices to return to normal levels after the refinery resumed production.
They didn’t. For the rest of the year, the mystery surcharge was about 48 cents a gallon. What was more disturbing was that it continued at unprecedented levels in 2016 (29 cents) and 2017 (27 cents), long after the Torrance refinery was back at full production.
Our 22-cent mystery surcharge this year is nearly twice as much as the 12-cent per gallon tax that is on the ballot. Yet, no one is trying to repeal the mystery surcharge. Since February 2015, it has cost Californians more than $17 billion, or about $1,700 for a family of four. And none of those dollars has gone to building infrastructure or helping poor families.
Searching for the Source of the Surcharge
The PMAC, five volunteer committee members who met 3-4 times per year and had less than one full time staff support person, issued a final report on the mystery surcharge in September 2017. Legislators thanked us, filed the report, and then promptly went back to fighting about gas taxes.
Looking at gasoline prices nationwide over the last four years provides some clues to the source of the surcharge. It doesn’t come at the refining end. The commodity price of California gas spiked in 2015, after the refinery fire, but it dropped again in 2016. Since then, the commodity price differential with the dirtier fuel used elsewhere in the U.S. has been around 10 cents, lower than in any year of the previous decade.
Instead, the surcharge shows up between the refineries and our gas tanks, in the distribution and retailing network. Many characteristics of these sectors suggest that California lacks the competitive pressure of other states.
Far more gasoline here flows through stations that are owned by refiners or have long-term contracts that give the refiners significant control over gas prices, about 50% in California versus 10% elsewhere in the U.S., according to the Energy Information Administration. Also, less gasoline is sold by off-brand stations – such as Costco, Safeway, or Rotten Robbie – which means they put less pressure on the major brands. In California, the price difference between majors and off-brands averages 23 cents per gallon, according to data from Gas Buddy. Elsewhere in the country, that difference is only 7 cents.
Open and shut case for a competition problem? Not so fast. California’s dominance by majors is nothing new. In fact, the share of gasoline for which they set or heavily influence the retail price fell from 77% in 1994 to 56% in 2014 and has continued to fall since. And the price gap between branded and unbranded has been climbing steadily since at least 2012, according to the California Energy Commission, a few years before the mystery surcharge suddenly appeared.
Furthermore, those facts alone don’t tell us what policies would help reduce the surcharge without having other unintended consequences. That’s why we need a serious and well-funded investigation by the state, with far greater financial and personnel resources than the PMAC had. Before we roll back the gas tax, shouldn’t we address the surcharge that is siphoning $3 billion per year from the California economy?
A shorter, graphic-less version of this blog ran in the Los Angeles Times on October 11, 2018.
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 Full disclosure: After completing a draft of this blog, I became aware that some of my colleagues at the Energy Institute have received research support for which the funding source is the new 12-cent gas tax.
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business and Faculty Director of the Energy Institute at Haas. 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. He chaired the California Energy Commission's Petroleum Market Advisory Committee from 2015 until its completion in 2017. Currently, he is a member of the Bay Area Air Quality Management District's Advisory Council.