Why CA Climate Change Will Lower Gasoline Prices

The fate of landmark climate legislation will be decided before the California statehouse closes for the year Friday. Its oil industry opponents are desperate to stop it, claiming the proposal will drive up prices at the pump.  In fact, Senate Bill 350,  currently written to cut California's gasoline use in half by 2030, will actually lower gasoline prices by increasing scarce gasoline inventories. 

That's why Big Oil is desperate to amend the legislation into oblivion.

It's simple supply and demand. Decrease demand, increase supply, decrease the price.

Chronically low inventories of gasoline have plagued California over the last year, as charted by the California Energy Commission. That's the reason Angelenos paid nearly $1 dollar more per gallon over Labor Day than Americans did.

With crude oil prices at historic lows, Golden State drivers have paid $5.3 billion more than US drivers since February, when refineries started to go down. That's after adjusting for marginal tax differentials and amounts to $225 more for every California driver.

The same problem of low inventories and periodic gasoline prices spikes has persisted over the last decade and one half, albeit without such dramatic cost consequences. Before 2015, the top gap between California and nationwide gasoline prices had been no more than 80 cents. This year the gap went over $1.50 in LA County.

The four oil refiners that control 78% of California's gasoline market claim California's special blend of clean burning fuel is to blame for persistent inventory problems and price differentials with the US, creating a geographic island.   

Their second quarter refining profits show, however, that the state's top refiners had their best profits ever from refining oil into California gasoline - or rather not making enough of it to go around.

By keeping us running on empty, every time a refinery goes down, gas prices and oil refiner profits go up.

Chevron, the state's top refiner, reported its best first half of the year from refining ever. Number two Tesoro posted its best second quarter from California refining profits ever. Fourth biggest refiner Valero showed an 1100% profit increase off California refining over last year.

The consolidation of California's refining market in the hands of the Big 4 has prevented Californians from enjoying the benefits of plummeting crude oil prices. 

Instead, according to California Energy Commission data, oil refiners in this state took home triple their usual margins in July rather than passing on the crude savings to consumers. $1.61 of every gallon went into their pockets.

California's oil refiners are the only industry in America who make more money when their factories break.

Few dispute that low gasoline inventories in California are here to stay without a major change because it's so profitable for the Big 4 refiners.  

With aging refining capacity (one is 113 years old), and no new refineries likely to come on line, the problem will only worsen.

Why would refiners build more refining capacity if they can charge more for making less gasoline?  And with crude oil at historic lows, Californians gas pumps are the refiners' most reliable ATM.

That's why Senate Bill 350's mandate to limit petroleum use and free up supply comes to the aid of the consumer, not just the climate. The bill breaks the hold of oil refiners over the market by cutting their market share in half and freeing refining capacity.

The mandate for 50% petroleum reduction in 15 years is much like the American mission to the moon. We didn't know how exactly we would get there when we set the goal but we knew the technology was available to do it.

There's little question EV battery cells with greater range will come on line at significantly reduced costs in the next five years.  Petroleum-based vehicles are gaining more gasoline efficiency due to new federal standards that will get the state significantly closer to its goal.  Hydrogen, bio-diesel and other non-petroleum fuels for government and corporate fleets are a big part of the solution.  Incentives for the use of EV and alternative fuel vehicles can get us to the goal with carrots and not sticks.

We cannot un-ring the bell of oil refiner consolidation, but we can set a goal of incentivizing cleaner vehicle fuel technologies that create competition for the oil refiners and lower fuel costs. In the new age of climate change, cleaner and cheaper energy can and must go together.

Legislators on the fence about SB 350 may fear the government will pump up prices with new taxes to discourage driving. But the greater threat of higher pump prices has always come from the oil refiners themselves and the oligopolistic power they now enjoy.

Who should Californians trust more: government regulators or oil refiners?  Given the Golden State gouging, there's little question.

Cheaper fuel is one more argument why California needs to do the right thing and lead the way for the world on limiting greenhouse gases.

Cross posted at Huffington Post

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