Californians might have to choose between higher gas prices or scaling back the state’s climate agenda, state regulators told legislators at a recent special state Senate hearing on a proposed oil industry windfall profits penalty.
Gov. Gavin Newsom called the special session of the Legislature last December to consider imposing penalties on oil companies to restrict them from making excessive profits in the state.
State regulators weren’t able to explain during the hearing why gas prices spiked last year, which caused some residents to pay up to $8 a gallon, although they said the state’s environmental laws contributed to the high prices.
“It may be California’s aggressive take on environmental protection and other things,” said Nicolas Maduros, director of the California Department of Tax and Fee Administration. “You all have to make some tough decisions about what direction the state goes and there are trade-offs.”
State Sen. Steven Bradford, a Democrat from Gardena and chair of the Committee on Energy, Utilities, and Communications, said many factors were to blame.
“There’s been a lot of finger-pointing among stakeholders,” he said. “Some say it’s standards for refineries, or raising prices. Others say it’s the gas retailers. Others are blaming the state’s taxes and environmental policies. I believe that it’s all of the above.”
The committee must be strong advocates for every Californian who still needs reliable and affordable gasoline and ensure greater transparency in the marketplace, he said.
“Any proposal must shine more light on the process, bring relief at the pump, and, most importantly, not make the situation worse,” Bradford said.
To stop gas prices from spiking, the governor wants to set a maximum profit margin for refiners and impose a price-gouging penalty if that’s exceeded. The penalty would encourage refiners to produce more gasoline instead, to boost profits, according to the California Energy Commission.
California’s supply of gasoline dropped dramatically last year as some refiners were closed for maintenance, adding to the price spike. The state’s gas production in 2022 was reduced by 88,000 barrels per day—equal to the output of a midsized refinery—compared to the prior year, according to David Hackett of Stillwater Associates, a transportation fuels consulting firm in Irvine.
The war in the Ukraine and COVID-19 shutdowns also contributed to higher prices, Hackett said.
Catherine Reheis-Boyd, president of the Western States Petroleum Association, said the penalty would have serious ramifications for market prices.
“The bill is unnecessary,” she said. “It puts further strain on the fuel markets. The amount of gasoline may be reduced.”
It would also cut union jobs and tax revenue for schools and local government, she said.
The California Chamber of Commerce also opposes the bill.
“We are particularly concerned about the precedent that the windfall profits penalty will set for the larger business community,” Chamber Chair Gregory Bielli said. “There’s a genuine concern that this basically establishes a playbook that the Legislature will use to determine what the reasonable profit to do business in California.”
During the hearing, it became clear that state senators on both sides of the aisle are concerned about how such a penalty could ultimately affect lower-income residents.
“As outraged as we all are about what’s happened to the lowest in our respective districts, what are the unintended consequences?” asked state Sen. Bill Dodd, a Democrat from Napa. “They could hurt those very people to a greater extent.”
Other market conditions in the state could also have contributed to last year’s price spikes, according to Severin Borenstein, an economics professor and energy expert at the University of California–Berkeley.
Often referred to as a “gasoline island,” California is cut off from oil supplies east of the Rockies because of a lack of pipelines. Most of the oil used by residents is produced by five companies that operate 11 in-state refineries.
That creates a less-competitive market, and fewer gas stations, he said. Some cities also banned construction of new gas stations last year.
“The problem is real scarcity,” Borenstein said. “The penalty or tax can allow the government to claw back some profits from high prices, but it can also disrupt the market. And for that reason, I think we have to be cautious in our use of it.”
Some legislators also said they are also concerned that the penalty would create higher prices.
Other attempts to curb oil industry profits in the past have failed.
In 1980, President Jimmy Carter imposed a windfall profits tax after Congress lifted price controls on domestically produced oil. The tax was economically devastating and increased dependency on foreign oil before it was repealed in 1988.
Alaska also tried implementing a similar tax in 2006 that brought in billions for the state, but oil drilling and investment decreased.
“The governor’s faulty policy experiment, while vague in details, has been tried before and failed,” said Assemblyman Vince Fong, a Republican from the Central Valley. “It didn’t work then, and it won’t work now. Governor Newsom’s flawed proposal will actually lead to higher prices and energy supply shortages.”
One option to lower prices would be to encourage more competition, some experts said.
“The only [option] that could begin to make a difference is if we somehow create more competition from other states,” said James Sweeney, a senior fellow from Stanford Institute for Economic Policy Research. “To create more competition from other states, we’re probably going to have to relax the environmental rules, and those have some big severe environmental consequences.”
Sen. Dave Min, a Democrat from Irvine, said it was a tough situation.
“There is clearly a belief out there among many people that oil companies were profiting off the backs of Californians,” he said. “At the same time, we don’t really have a smoking gun, as far as I can see, that shows intentional collusion.”
The price per gallon for gas in California has continued to tick up, reaching an average of $4.76 on Feb. 26, according to the Automobile Club of Southern California. That was about $1.39 more than the national average and about 3 cents more than last week.
