California Oil Profit Penalty Bill Makes Little Progress

After California gas prices jumped to more than $6.40 a gallon last summer, Gov. Gavin Newsom led the charge against an industry he says is “ripping you off.”

Months later, it is unclear if the California Legislature is following him.

Newsom, a Democrat, called lawmakers to a rare special meeting in December to enact the nation’s first punishment for excessive profits by oil companies. But three months later, the bill is still in the Democratic-controlled legislature, with no details on the size of the fine or when the oil companies will have to pay it.

The oil industry has spent about $34 million lobbying the Legislature in the last two-year session and remains a powerful political force, especially among Democrats who represent those parts of the state where the industry provides jobs. Passing this proposal would require the support of a majority of legislators.

The bill poses a big risk for Newsom, who was just re-elected in November and is seen as a possible presidential candidate until 2024. Newsom supported electric vehicles by ordering state regulators to ban the sale of most new gasoline-powered vehicles by 2035. But for decades, gasoline is likely to remain a critical commodity in California, a state that has twice as many licensed drivers as any other state.

Historically, gas prices in California have always been higher than in the rest of the country due to higher state taxes and fees, as well as a special blend of gasoline that regulators require because it’s better for the environment. environment.

But state regulators say they can’t explain recent price spikes, like last summer’s, when at the peak some Californians paid up to $8 a gallon while oil companies recorded extra large profits. Newsom’s solution is to penalize oil companies when their profits get too high and return that money to the public.

During the bill’s first public hearing in the State Senate on Wednesday, many Democrats sympathized with drivers hurt by the price hikes. But some Democrats were skeptical.

“What the hell are the possible unintended consequences that could hurt those people the most?” asked State Senator Bill Dodd, a Napa Democrat.

Dodd wanted to know what would prevent refiners from simply shipping their products to other states to avoid making profits in California that could result in a fine. State Senator Stephen Bradford, a Democrat from Los Angeles, wondered how the Newsom administration would return money to the public.

Nicholas Maduros, director of the California Department of Revenue, said years of data show California is one of the most profitable markets for these oil companies, meaning it doesn’t make sense for them to stop selling gasoline there. In addition, he said the Newsom administration hoped the fine would never be needed.

“This is not a tax. It is not intended to increase income. It is designed to change behavior,” Maduros said.

Katherine Race-Boyd, president and CEO of the Western Oil Association, said the real reason for California’s high gas prices is not profit, but lack of supply. She said Newsom’s proposal would only make matters worse because oil companies would likely supply less gasoline to the state to avoid paying a fine.

“It’s too important to be wrong. Let’s move for the better, not for the political path,” she said.

Newsom said the reason the bill is taking so long to move forward is because of a “lack of transparency” from the big five refineries that supply almost all of California’s gasoline. These companies – Valero, Phillips 66, PBF Energy, Marathon and Chevron – refused to testify at the public hearing.

“Today’s hearing provided even more evidence that we need to fight Big Oil price gouging at the gas station,” Newsom said. “Big Oil lobbyists again used scare tactics and refused to give answers or solutions in connection with last year’s price spikes.”

The big question is how much profit will trigger the penalty. Consumer Watchdog, a non-profit group that Newsom often cites when criticizing oil companies, wants this threshold set any time an oil company’s profits exceed 50 cents a gallon.

One way to measure this is to look at the difference between the wholesale cost of gas and the cost of crude oil. But that calculation isn’t perfect because it doesn’t include the oil company’s operating costs, said Jamie Court, the group’s president.

Over the past 20 years, the big five refineries have average profits of 32 cents a gallon, Cort said. The group says all five major refineries are over 50 cents in 2022. If this threshold were law in 2022, Consumer Watchdog said it would result in $3.3 billion in fines.

“The real problem in California is that we have five refineries that make 97% of our gasoline,” Court said. “When they want to squeeze us, they can.”

On Wednesday, a group of economists and experts, some of whom are linked to the oil industry, largely criticized the proposal, saying it was unlikely to lower gas prices.

Severin Borenstein, a business professor and energy policy and fuel pricing expert at UC Berkeley, said drivers in the state paid $8 billion more last year than if prices were the same as the rest of the country.

But he said lawmakers should focus more on requiring oil companies to disclose more price information so regulators can better understand what is driving growth.

“The thing is, shooting first and then figuring out if it’s the right decision is likely to be as harmful as it is beneficial,” Borenstein said.