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The Mystery Gasoline Surcharge Gets Some Respect

Californians have paid over $1800 per household. Now can we please find out why?

California gas prices are over the dreaded $4 mark. That turns out to generate a lot more media coverage, commentator outrage, and political interest than any graphs or explanations of the Mystery Gasoline Surcharge. But, the good news is that the high gas prices are prompting inquiries into the MGS, as we gasoline price mavens call it (OK, possibly just me).

AgainMGSFig2To refresh your memory, the MGS is the difference between California’s gas price and the average price in the rest of the country after you take out the state’s higher taxes and environmental fees, as well as the cost of making our cleaner-burning gasoline. The MGS is a mystery, because prior to a refinery explosion in February 2015 it pretty much didn’t exist. It averaged about two cents per gallon from 2000 to 2014, but since then it has been adding more than 25 cents to the price of California gasoline. (My most recent MGS spreadsheet is here and a detailed explanation of the calculation is here.)

AgainMGSFig1These extra payments are not filling government coffers. They are going to suppliers, though we don’t know which suppliers are actually getting the money. We also don’t know if they are covering legitimate costs or just goosing profits. In fact, we don’t know much other than the fact that something changed substantially back in 2015, and it has been inflating our gasoline prices ever since.

The MGS increased to nearly 40 cents towards the end of 2018, which got the attention of 19 legislators from our state Senate and Assembly. In January, they signed a letter asking the California Attorney General to investigate why California’s prices have gotten so far out of line. Then after another price spike that began in March, Governor Newsom got pulled into the MGS fray last month when a reporter asked him what he made of the mystery surcharge. A few days later he assigned the California Energy Commission the task of looking into it.

The CEC issued a preliminary report on Friday. It confirms that since February 2015, California gas prices have been consistently higher compared to the rest of the US than was previously the case. Sadly, the report takes a pass on the term Mystery Gasoline Surcharge, opting instead for the much less evocative “residual price increase”. Yawn.

This interest on the government side has been met with strong opinions about the MGS from market participants, political commentators, and consumer groups, with interpretations from benign to possibly criminal.

Some Non-Explanations

Industry spokespersons and some others incurious about what’s been happening have said that California’s higher prices just reflect higher taxes and stricter environmental rules. “Nothing to see here. Move along.” But the MGS is what is left after accounting for the differential in taxes and environmental regulations, so that isn’t it.

AgainMGSFig3Nor can the MGS be easily attributed to steeper land prices, wages or other higher costs of doing business in California.  Those cost factors existed prior to 2015, when the MGS pretty much didn’t exist.

Unfortunately, the recent media passion for covering gasoline prices is confusing the MGS with two other factors that have increased prices, but aren’t really a mystery. First, as crude oil prices rise they drive up fuel costs everywhere in the country. Higher crude prices are a bummer for consumers, but pretty much out of reach for state policymakers. Not a California issue.

Second, a number of unplanned refinery outages starting in late March have caused prices to jump. Temporary price spikes after refinery disruptions are worrisome and costly, but they have been happening for more than two decades. Prior to 2015, they balanced out with other periods of oversupply (and negative MGS) to give California an average price that overall contained no mystery.

In contrast, the MGS was over 40 cents per gallon in 2015 and between 25 and 30 cents in 2016, 2017, and 2018. And it remained in that range in the first few months of 2019, prior to the Benicia refinery disruption on March 24 that triggered the current price spike. In no year between 2000 and 2014 did the MGS average more than 12 cents, and we had many refinery disruptions during those years. Furthermore, in every year between 2000 and 2014 the MGS was negative in at least one month. That has not happened in any month since the February 2015 Torrance refinery fire.

It is very important to distinguish between this continuous increased gasoline price and the occasional price spikes that occurred prior to 2015 and have occurred since, including in the last month. Price spikes could be completely a reflection of so-called “market fundamentals” when some refinery production is disrupted. That, however, cannot explain more than four years of continuously inflated gasoline prices.

AgainMGSFig4Understand the Causes Before Prescribing Solutions

The bottom line is that something has fundamentally changed in California’s gasoline market. In a previous blog, I discussed possible explanations. It could be a decline of competition. It could be the result of regulations that have raised the cost of selling gasoline in California. It could be logistical problems with importation or distribution of gasoline. I don’t claim to know the reason, even after chairing the Petroleum Market Advisory Committee for most its existence from 2014 to 2017, during which it examined gasoline prices in California, though with almost no investigative authority or resources.

Compared to the status quo prior to February 2015, the MGS has cost California consumers about $20 billion, and payments continue to flow at a rate of about $4 billion per year. Even in California’s large economy and large state budget, this is a lot of money. Given these magnitudes, it certainly seems sensible for the state to invest a few million dollars trying to gain a better understanding of the cause of the MGS.

If the cause were found to be costly regulations, the legislature could consider changes that achieve the same goals without imposing such costs on producers and consumers. If the cause were found to be a lack of competition, antitrust cases might be brought, including retrospective prosecution of past mergers that have turned out to be anti-competitive. Or, laws might be changed to address requirements refiners impose on retailers that might be reducing competition. If the cause were found to be logistical impediments, state or private investments might help to reduce those bottlenecks or other barriers. But the first step is to investigate and determine the cause of the mystery gasoline surcharge.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Borenstein, Severin. “The Mystery Gasoline Surcharge Gets Some Respect” Energy Institute Blog, UC Berkeley, May 20, 2019, https://energyathaas.wordpress.com/2019/05/20/the-mystery-gasoline-surcharge-gets-some-respect/

Severin Borenstein View All

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 and a member of the Board of Governors of the California Independent System Operator.

9 thoughts on “The Mystery Gasoline Surcharge Gets Some Respect Leave a comment

  1. “If the cause were found to be a lack of competition, antitrust cases might be brought, including retrospective prosecution of past mergers that have turned out to be anti-competitive.”

    Antitrust cases might be brought – by whom? For now, the SEC is showing no interest in getting involved in local fuel pricing issues, but maybe under another administration they will. While they’re at it, investigators might also take a hard look at Sempra, Edison International, and PG&E Corporation – self-dealing, vertically-integrated companies with a natural gas subsidiary selling gas to an electricity subsidiary (manipulated fuel costs increase electricity rates, allowing holding companies to pay themselves with customers’ money).

    When irregularities appear in energy markets holding companies, masters at the art of price-fixing, are always the first place for the SEC to look. With $100 million in contributions to state legislators over the last decade, whether anyone in Sacramento will look is doubtful.

  2. Thanks for nudging this into the political arena for semi-action. I’m forwarding it to my Senator (McGuire) and Assembly Member (Levine) to see what they will do.

  3. There seems to me to be nothing unreasonable about a 5% risk premium for operating in California. It’s much lower than many other increased costs that are faced in California, such as, unfunded/underfunded pension liabilities in California. As refineries age, and each “event” could be the last, I’m not surprised at all refineries are attempting to accelerate their recovery period.

    I am an econometrician and would probably enjoy reviewing the models and datasets if a link is available.

  4. O Give me a break.
    This is an example of the ‘rigged free market’ – collusion no- collusion. Why is it that at the typical corner 2-3-4 gas stations the price is usually within 2-3 cents. Price signaling.

    I have wondered if a social media managed boycott of gas purchases is feasible – a la the no-sex strikes by women in some African countries – and would have any effect.

  5. Since roughly 2010, ownership/pricing control of most “Arco” stations, “Mobil” stations, some “Exxon” stations, some “Shell” stations, and “76” stations have changed. With that comes a potential change in pricing philosophy. The CEC report misses that and also misses the fact that the profitability of discount sellers such as Costco also seems to have increased, although less than that of the major brands.

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