Energy

Here’s Why Californians Are Getting Reamed At The Gas Pump Despite Rock-Bottom Oil Prices

A stack of U.S. dollars. By MediaPhoto.Org - mediaphoto.org Own work, CC BY 3.0, https://commons.wikimedia.org/w/index.php?curid=27854373

• Gas prices are falling all over the United States, with some areas enjoying close to $1-per-gallon gasoline, as oil prices and coronavirus are delivering a one-two punch. 
• Californians are not getting as much relief at the pump as some Kentuckians and Tennesseans who are enjoying sub–$1 per gallon prices.
• Environmental policies, gas taxes and a lack of oil refinery capacity are pushing prices up on Californians as the state’s economy contracts.

Gas prices are falling all over the country as oil prices tumble, yet prices are still relatively high in California, where environmental polices are restricting how oil refineries can produce gasoline.

The price of a gallon of gas has plummeted in Ohio to around $1 in part because Americans are self-isolating to avoid spreading the novel coronavirus. The average price dropped 35.1 cents over the past month, according to data from the AAA and Oil Price Information Service.

A BP station in Kentucky, for instance, posted a price below $1 a gallon, The Washington Post reported Thursday. Four other stations in Oklahoma City followed suit, along with another in Paris, Tennessee. The national average for gas on Thursday was $2.03, down from $2.41 at the beginning of March.

The decrease is due in part to the virus, which began in China and has killed more than 30,000 people worldwide, as well as the oil wars between Saudi Arabia and Russia. Prices remain in the low $30s after the Saudis pushed for a cut in output while Russia increased to squash U.S. natural gas.

California is lagging behind even though the average price of a gallon of regular gasoline dropped in Los Angeles County to its lowest since 2018, falling 2.7 cents to $3.21, according to CBS Los Angeles.

Analysts say the state’s prices will eventually come down to the national average, but it might take some time. Here are some of the factors that affect California’s pump prices, which are the highest in the continental United States, according to data from AAA.

BREAKING: The national average price of gas has fallen to $1.99/gal due to COVID-19. https://t.co/uOCDlAtADQ pic.twitter.com/Dky7SpqnRH

— GasBuddy (@GasBuddy) March 27, 2020

Taxes, Taxes And More Taxes

Former Gov. Jerry Brown signed a bill in 2017 imposing a 12-cents-a-gallon increase on citizens and raising the tax on diesel fuel by 20 cents a gallon — the figure is a percentage of the whole price. Thus, when there’s an increase in the underlying price of fuel, the sales tax also increases.

The State Board of Equalization, which is responsible for administering California’s tax policies, sometimes annually adjusts the state’s two excise taxes to help offset changes in the sales tax.

California is the seventh highest in the country when it comes to total taxes and fees, according to figures the American Petroleum Institute calculated. The recent increase makes California the second-highest gas tax in the country behind Pennsylvania.

Analysts say taxes are a big burden.

“The bottom line is that the first $1.12 per gallon paid at the pump goes to ever-increasing state taxes and to California’s extensive regulatory regime,” Kevin Slagle, vice president of communications for Western States Petroleum Association, told the Daily Caller News Foundation. 

Strict Fuel Formula Mixture

California’s strict environmental rules mandate gasoline sold within the state be produced according to strict formulas designed to reduce pollution. For citizens, the exotic formula makes a gallon of gas more expensive and difficult to produce. Few refineries outside the state are equipped to produce it.

Worse yet, the gasoline formula changes multiple times a year, switching from a winter recipe to a summer blend designed to slow down evaporation. The summer blend is even more expensive and trickier to make, thereby elevating the risk of refinery mishaps. Refiners also use up inventories of either blend before the switch, increasing the risk of price volatility.

No Interstate Pipelines And Few Refineries

Analysts say the lack of refineries and environmental policies are also playing a role.

“California is a bit of a petro island,” Patrick DeHaan, a petroleum analyst at GasBuddy, told the DCNF, referring to the state and the West’s overall lack of oil refineries. “There’s less potential relief avenues if refineries have issues.”

California has 15 refineries with the ability to produce 1.9 million bpd, giving the West Coast few ways of obtaining fuel from the Gulf Coast or other parts of the country. The Golden State gets fuel from Asia and the Middle East when refineries are shuttered due to shortages.

“There have been a number of refinery closures in the last 10, 15, 20 years as California has become more restrictive on how to produce gasoline and what specifications that they have to get to,” DeHaan said.

He added: “Environmental policy has been one of the reasons (gas prices) have been higher than in other areas.”

Californians could eventually feel some relief, but state “is going to have some catching up to do,” DeHaan said.

Interstate pipelines could funnel gasoline quickly and cheaply to California, but no such pipelines exist connecting West Coast refineries to the Golden State. The state must therefore get the bulk of its fuel from ship or truck.

Only when pump prices are soaring inside California is it worth it to pay those transportation costs for refiners capable of producing California’s gasoline formula. The state’s refineries also tend to keep inventories tighter than the national average, federal energy statistics show.

As a result, prices surge quickly when a disruption occurs from events such as machinery breakdowns, power outages or labor problems. Imports of gas into California increased to more than 10 times their typical level after an explosion in 2015 took an ExxonMobil refinery in the state offline.

State officials accepted thousands of barrels of refined oil from Russia and India at the time.

California Gas Stations Are Disappearing

California officials have increasingly rezoned land leading to more housing developments and fewer service stations. Exploding housing prices prompted the decision to rezone, if for no other reason than to relieve the problem and lower rent prices.

Median monthly rent for a single-bedroom home in San Francisco is roughly $3,400 as of late 2019, according to industry tracker Zumper. Median rent for a similar home in Las Vegas, meanwhile, is $925 and $945 in Phoenix. Subsequently, more than 23 gas stations have closed in San Francisco since 2010.

There are also 40% fewer gas stations in the city than there were just a decade earlier. Fewer stations mean less access for drivers and a lack of competition among retailers — more than 90% of California’s 10,000 gas stations are affiliated with major corporations, according to a 2015 report from the Los Angeles Times.

Antagonistic To Fossil Fuels 

San Francisco, Oakland and San Mateo in California opened lawsuits asserting five oil companies, including Exxon and Chevron, should pay fines for contributing to global warming. Oakland has also sought to prevent energy companies in Wyoming and Montana’s Powder River Basin from transporting their coal from the city’s ports to international markets.

California faces a tough situation if the lawsuits miss their mark.

Nearly 40% of the state’s crude oil is produced inside the Golden State, even though California lacks refineries. Exxon, Chevron and others being sued will almost certainly pull out of California if the litigation is successful. The oil industry also contributes $66 billion of gross income for 2.7% of the state’s gross domestic product.

State lawmakers are also teeing off against traditional automakers.

Democratic state Assemblymember Phil Ting, for instance, introduced a bill in 2018 that would, if passed, ban the sale of gas-powered cars produced after 2040. He said California drivers must adopt electric vehicles if the state is going to reduce greenhouse gas emissions. Ting wants a full shift to electric vehicles.

Californians haven’t gotten the memo.

Electric vehicle sales in California amount to less than 5% of the state’s overall car sales, despite the state’s title as a champion for the electric vehicle market. Analysts, meanwhile, said the market for these types of vehicles is not anywhere near large enough to overcome gas-powered vehicles. The state’s belligerent attitude toward fossil fuels places a lot of downward pressure on California’s already taxed energy market.

EDITOR’S NOTE: This article was originally published on Oct. 23, 2019. It has been updated to include reports about coronavirus, Russia and Saudi Arabia’s oil recent oil wars, and the drop in oil and gas prices.