Price Gouging at the Pump? California’s Gasoline Price Spikes and Newsom’s Plan to Require Fuel Reserves at Refineries

     I remember driving home from work on September 11, 2001. My wife had told me to fill up my gas tank. I remembered closer to home and noticed that some of the stations more than doubled the gas price. I was able to find one that only spiked a dollar or so and got it there. That was recognized as a very clear case of price gouging. According to Wikipedia:

“Price gouging is a pejorative term used in the USA (but not in most other English speaking countries) to refer to the practice of increasing the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair by some. This commonly applies to price increases of basic necessities after natural disasters. Usually, this event occurs after a demand or supply shock. The term can also be used to refer to profits obtained by practices inconsistent with a competitive free market, or to windfall profits. In some jurisdictions of the United States during civil emergencies, price gouging is a specific crime. Price gouging is considered by some to be exploitative and unethical and by others to be a simple result of supply and demand.”

The price gouging during the early stages of the COVID pandemic is now legendary. We all remember the toilet paper price spike. There was no doubt much gouging and ratcheting up of prices disguised as necessity occurred. Market uncertainty led to market instability and then market manipulation. ‘Skimpflation’ became a thing. As time went on, this self-corrected. Grocery prices have stabilized and are dropping in some cases. However, the damage has been done. The other main issue, supply chain disruption, in some cases severe, has also lessened over time but is still occurring. Oddly, it seems like much of the damage to supply chains was deep and some may not be less optimized than they could be. That is just my random guess observation. It still seems like there is stuff not kept in supply on shelves. This means that Kamala Harris’s proposal on grocery price gouging is ill-advised and will probably be dropped. It’s a nice sentiment but it’s just not necessary. However, her proposal could have the threatening effect of making grocers more careful about raising prices.

     Anytime there are price spikes due to market conditions, namely supply-demand disruptions, there is the question of whether this is a kind of price gouging. One example is cold weather events that exhaust the local natural gas supply so that shortages become possible due to the gas deliverability system, or the pipelines, being inadequate in overall size. Local city gate prices can spike significantly for this reason. In some cases, the midstream and distribution companies were ironically prevented from expanding their systems due to environmentalist opposition to new pipelines and upgrades. The cause: deliverable fuel shortages due to infrastructure inadequacies leads to the result: higher prices for consumers. A question arises as to how much of those price increases are due to market conditions and how much is due to price gouging. Market mechanisms can get complex, but it comes down to what prices best reflect supply-demand conditions. I wrote several years ago about an idea of demand response for natural gas that could mitigate these kinds of price spikes through detailed demand response plans, proposed by the Environmental Defense Fund and others. Softening price spikes was the goal.

     In California, Governor Gavin Nesom recently proposed a rule that would require refineries to keep more fuel onsite to mitigate or soften gasoline price spikes that often occur due to refinery units shutting down for maintenance. In Ohio recently, a refinery in Lima that refines 183,000 Bbls per day shut down due to an undisclosed issue, resulting in local gasoline prices rising, though not exceedingly, maybe 30 cents/gal at max. The California Gas Price Gouging and Transparency Law, Senate Bill X1-2, took effect in June 2023. It set up an independent watchdog to asses potential gouging and authorizes regulators to penalize the oil industry for violations. It authorized the California Energy Commission (CEC) to assess factors leading to price spikes.

 

“CEC is closely tracking gas prices as part of SB X1-2 implementation, looking at the influence of several factors, including gasoline supply and refinery maintenance. The CEC’s Energy Assessments Division is taking the lead in implementing the data collection, reporting, and assessment activities under the law.”

 

All the blue price spike tips seen on the graph below can be profitable for refineries and the issue is to peak shave both the pricing and the profiteering.

     A workshop held in June 2024 resulted in Newsom’s new plan, based on that CEC assessment, to require minimum fuel supplies at refineries. The main finding was that price spikes were “overwhelmingly caused by refiners not backfilling supplies when they go down for maintenance.” I think that in this case, I agree with Newsom and the CEC. This shortage is a manufactured shortage. It is a supply chain issue, but one that could easily be fixed. According to news reports:

 

“The CEC found that last year, there were 63 days when California refiners maintained less than 15 days of gas supply — driving up prices.”

“Newsom said that if the new plan had been in effect last year, Californians would’ve saved upward of $650 million in gas costs due to refiners’ price spikes.”

It should also be acknowledged that California is an isolated fuel market where fuels sold in the state are refined in the state. It is a local market that is more amenable to shortages with its pricing more vulnerable. Thus, some higher pricing is expected in California. Therefore, one should not expect results that would make California fuel prices on par with other parts of the country.

     While unplanned refinery maintenance combined with inadequate fuel reserves has been tagged the main issue, there may be other contributing issues such as California’s lower emissions summer fuel blend that helps reduce smog formation, a serious problem in urban California. Gasoline prices in the state average about 30% higher than the national average. In a 2022 statement Ed Hirs, a fellow at the University of Houston pushed back on any price gouging accusations:

 

“The real issue is you’ve lost several hundred thousand barrels a day of refining capacity,” Hirs said. “And to make up that supply, people are having to shift supplies from other parts of the nation, and that just costs money.”

 

More pipeline capacity could enable better fuel supply access and deliverability. Refiners blamed the 2022 price spikes on California’s energy regulations for leading to a tight supply situation. The high fuel prices that year sur the Russian invasion of Ukraine, no doubt contributed to the problem then.

     Since California refiners already stock fuel reserves in the winter they have the tank capacity to store summer blends as well. According to World Matrix:

 

“Under the new proposal, California’s petroleum refiners would be required to demonstrate their resupply plans and arrangements to the CEC, ensuring that these are adequate to compensate for any production losses due to maintenance. The CEC would also have the authority to enforce a minimum fuel inventory requirement to stabilize the supply, with penalties imposed on refiners who fail to comply.”

 

They also point out that Australia, Japan, and some EU countries have similar on-site fuel reserve requirements. If deemed successful, other states could enact similar rules but that is unlikely since California is a large gas market, the most isolated continental market, has extra clean energy requirements, and whose strict energy regulations are generally not emulated.

 

 

References

 

Calif. Gov. Gavin Newsom unveils plan to require oil companies to maintain minimum fuel reserves. Kristin J. Bender, Bay Area News Group. Tribune News Service. August 15, 2024. Calif. Gov. Gavin Newsom unveils plan to require oil companies to maintain minimum fuel reserves (msn.com)

California Gas Price Gouging and Transparency Law Update. California Energy Commission. July 19, 2024. California Gas Price Gouging and Transparency Law Update

What Drives California’s Gasoline Prices? California Energy Commission. September 2022. What Drives California’s Gasoline Prices?

California repeatedly warned about spiking gas prices, fragile supply. But fixes never came. Grace Toohey. LA Times. October 8, 2022. Why are California gas prices so high and supplies so unstable? - Los Angeles Times (latimes.com)

California’s Newsom Wants Refiners to Amass Fuel Stockpiles. Kevin Crowley and Karen Breslau. Bloomberg. August 15, 2024. California’s Newsom Wants Refiners to Amass Fuel Stockpiles (msn.com)

Reservoir Dogs: Newsom’s New Plan Targets Big Oil To Lower California Gas Prices. Cynthia Talbot. World Matrix. August 16, 2024. Reservoir Dogs: Newsom’s New Plan Targets Big Oil To Lower California Gas Prices (msn.com)

Price gouging. Wikipedia. Price gouging - Wikipedia

Cenovus Shuts Unit at 183,000-BPD Refinery in Lima, Ohio. EnergyNow Media. July 31, 2024. Cenovus Shuts Unit at 183,000-BPD Refinery in Lima, Ohio - Energy News, Top Headlines, Commentaries, Features & Events - EnergyNow.com