The California Energy Commission (CEC) sent a letter to executives of the top refineries in California on September 30, 2022 demanding explanations for the “sudden and unprecedented” increase in gasoline prices over the past 10 days. (See Newsom Directs CARB to Allow Early Release of Winter-Blend Gasoline.)
In their responses, refiners denied price gouging or market manipulation and generally held that the price increase was the result of California’s environmental regulations, fuel requirements, fuel taxes, and policies that have reduced refining capacity. (Two refiners noted that disclosure of information on their operations would violate California and federal antitrust laws.)
Valero noted that California “is the most expensive operating environment in the country and a very hostile regulatory environment for refining.” The refiner stated that “California policy makers have knowingly adopted policies with the expressed intent of eliminating the refinery sector.” This includes carbon cap and trade fees and low carbon fuel standards. “With the backdrop of these policies, not surprisingly, California has seen refineries completely close or shut down major units.”
CEC’s Questions
The CEC requested responses by October 3, 2022 to three questions:
Why have gasoline prices risen so dramatically in the past 10 days despite a sharp downturn in global crude prices, no significant unplanned refinery outages in the state, and no increases in state taxes or fees?
If logistics or other obstacles have contributed to the price increases, what measures could the State of California take to address them without sacrificing environmental or public safety concerns?
Why did refiners allow inventory levels to drop when they have known for months, or in some cases years, that planned maintenance would occur at this time?
Refiners Responses
Other refiners highlighted several factors for the increased gasoline prices:
California gasoline blend: California’s specific gasoline blend required by the California Air Resources Board, known as CARBOB gasoline, costs more to produce. There is also limited refining capacity to produce the blend, as it is not readily available elsewhere. A refiner also noted that California summertime gasoline season extends beyond other U.S. regions.
Reliance on imports: California relies on imports from Asia to meet demand for its specific gasoline blend, and marine vessels to ship the gasoline have been in short supply since the recovery from COVID-19.
Reduced refining capacity: California’s refining capacity has been reduced by approximately 1 million barrels since 1980. One refiner cited the August 2020 “shutdown of a 166,000 barrels per day East Bay refinery, compounded by reduced imports in 2022…” The refiner stated that the “effects of the 2020 refinery closure were not evident until post-COVID demand for fuels began rebounding.”
Scheduled refinery maintenance: A refiner cited the need for refinery maintenance and said the company provides CalOSHA with its operating plans at least a year in advance. The refiner noted that the outages are planned and the refiner has otherwise been running at near full capacity.
Reduced California crude oil production: Additionally, the refiners noted that California domestic crude oil production has been in decline. Imports are difficult, as California’s oil and fuel markets are largely isolated from the rest of the United States due to the lack of pipelines to deliver oil into the state. The available marine terminals for seaborne imports are at regulatory capacity.
Global factors: A refiner noted global factors that have constrained the oil markets, including post-COVID demand rebound, reduced U.S. and Canadian refining capacity, and the impact on the global market from the Russian invasion of Ukraine.
Gasoline taxes: A refiner also noted that California has the “highest effective tax rate (excise, sales, and other taxes and fees) on gasoline in the U.S.”
In September, Newsom signed into law SB 1322, known as the California Oil Refinery Cost Disclosure Act, which implemented additional refinery reporting requirements. (See California Implements Additional Refinery Reporting Requirements.)