Why are gas prices higher in California than in other states?
Gas prices in the US have decreased, but in California, they remain stubbornly high. What is the reason for the difference in price?
The US Energy Information Adminstration predicts crude oil prices to average around $93 per barrel in the fourth quarter of 2022. The current price sat at $87 as of 12 October, meaning drivers may need to factor in a possible rise in price at the pump this winter.
In California, increasing oil prices are already hitting consumers who are paying, on average, $6.25, down slightly from the $6.31 seen in early October.
There are nine oil refineries in the Golden State, all of which have seen a substantial increase in profits over the last year. Some oil companies like PBF Energy and Valero Energy have seen an increase in their revenue above one thousand percent compared to their earnings in 2021.
|Oil Company||Q2 2021||Q2 2021||Change (2021/2022)|
|Marathon Petroleum Corp||$9.06 billion||$2.19 billion||+313.70%|
|Chevron U.S.A. Inc.||$11.6 billion||$3.1 billion||+274.19%|
|PBF Energy||$1.36 billion||$74.4 million||+1737.84%|
|Phillips 66||$3.3 billion||$329 million||+903.04%|
|Valero Energy||$4.7 billion||$162 million||+2801.23%|
What has led to increased gas prices in California?
Over the last decade, the number of refineries in the state has fallen by five to fifteen. In October 2019, the West Coast refined around 1.6 million barrels of oil a day, which has since fallen to 1.4 million barrels in July 2022. It can also not be argued that the pandemic is entirely to blame for the decrease since, in October 2021, the West Coast was producing around 2.1 million barrels a day.
Additionally, some experts like Severin Borenstein, a professor at UC Berkeley, have noted that the decline in refining capacity does not explain the continued high prices.
Compared to the rest of the country, drivers in the Golden State are paying $2.61 more than those in the rest of the country. Because of higher taxes on gasoline and the state’s cap and trade program, it is typical for consumers to pay around $0.85 more than other drivers. This still leaves more than $1.00 of ambiguity as to why the prices in California remain too high.
Professor Borenstein tracks part of the price to a refinery fire in 2015 that significantly disrupted supply and led to a subsequent increase in price. However, even after capacity increased, prices never came down to the level seen before the fire.
As seen with the rapid increases in profits from refinery companies, part of the price surge has to do with oil companies exploiting the geopolitical crisis in Ukraine, which has increased demand for US energy resources after embargos have been implemented against Russia.
While Dr. Borenstein does not have any direct evidence of collusion, an accusation often launched at OPEC and its members, he did say that “these firms are going to try to make as much money as they can.” In California, they can take advantage of “a less competitive gasoline market than the rest of the country,” which holds this status, at least in part, “because we use this cleaner-burning gasoline formulation that we can’t trade with the rest of the country, partially because two refiners in California control about half of the entire gasoline market.” Those two refineries are Marathon Petroleum Corp and Chevron USA, which together can refine more than 875,000 barrels of oil a day.
The university professor would like to see the state begin an investigation into the price issues, which has yet to be done.
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