While Utah drivers face an upcoming state gas tax hike on January 1, 2023 of 4.5 cents per gallon, a much louder battle on the same subject is unfolding in California. However, while common sense is the norm in Utah when discussing energy prices, the Governor of California, Gavin Newsom, has apparently thrown common sense out the window on his latest politically pandering rant.

Governor Newsom has called a December 5th special session of the California Legislature to “consider a tax on excess oil company profits”. During a press conference announcing the effort, Newsome said he was working on how to best tax the excess profits of oil companies and return it to the pockets of Californians. Apparently the esteemed Governor of the Golden State never attended an economics 101 class where the professor explained how all taxes on a business are paid for by the end consumer, employees and shareholders – not the business. Any effort by California to further tax oil companies will fall squarely on the California consumer – the very people Governor Newsom claims to be helping.

However, the most boneheaded comment by far from Newsom was his claim that “there is no logical explanation for why gas prices in California are $2.50 per gallon higher than the national average”. A statement like that makes one ask, what planet is he living on?

As any Utahn who has driven their family to California to see the Utes play in the Rose Bowl (let’s all pray we get to do that again) or visit Disneyland over the last decade or so knows, gas prices have always been higher in recent history in California.

One of the reasons gas prices are higher in California is that it boasts the highest state gas tax in the nation. The total tax of 66.98 cents per gallon is more than double the current Utah gas tax of .319 cents per gallon and the national average at about the same level as Utah.

While taxes are a factor in determining the final price consumers pay, economics, regulations and market forces are the main drivers. The swift reactions from the various energy companies doing business in California gave an excellent lesson on these factors. 

Valero, an oil refining company that has operations in California, said several things:

As to separation between California prices and the prices in the rest of the United States, we can offer the following information. For Valero, California is the most expensive operating environment in the country and a very hostile regulatory environment for refining. California policy makers have knowingly adopted policies with the expressed intent of eliminating the refinery sector. California requires refiners to pay very high carbon cap and trade fees and burdened gasoline with the cost of the low carbon fuel standards. With the backdrop of these policies, not surprisingly, California has seen refineries completely close or shut down major units. When you shut down refinery operations, you limit the resilience of the supply chain. 

From the perspective of a refiner and fuel supplier, California is the most challenging market to serve in the United States for several additional reasons. California regulators have mandated a unique blend of gasoline that is not readily available outside of the West Coast. California is largely isolated from fuel markets of the central and eastern United States. California has imposed some of the most aggressive, and thus expensive and limiting, environmental regulatory requirements in the world. California policies have made it difficult to increase refining capacity and have prevented supply projects to lower operating costs of refineries. 

We believe the Commission experts understand that California cannot mandate a unique fuel that is not readily unavailable outside of the West Coast and then burden or eliminate California refining capacity and expect to have robust fuel supplies. Adding further costs, in the form of new taxes or regulatory constraints, will only further strain the fuel market and adversely impact refiners and ultimately those costs will pass to California consumers. 

They also mentioned:

As the Commission knows, and as countless investigations have demonstrated, market drivers of supply and demand, together with government-imposed costs and specifications, determine market price. Ironically, on the same day we received the Commission’s letter, a federal judge in a 103-page reasoned order, following review of thousands of pages of documents and hours of depositions and discovery, yet again threw out another case alleging price conspiracies by the fuel industry finding no basis for the allegations. 

Phllips 66, another global operator with operations in California, spoke to the logistics issue that California elected officials have boxed them and driven prices higher with:

We are aware of several hurdles that impact access to crude and supplying refined finished products. California’s demand for gasoline and diesel is one of the highest in the world, and California refineries primarily produce what is referred to as CARBOB. 

This is produced specifically for use in the state, mostly by in-state refiners. There is limited U.S. refining capability outside of California to produce the specialty California fuel blend, and demand often exceeds in-state capabilities. As a result, California relies heavily on imports from Asia. On average, securing supply from Asia and the necessary freight takes approximately 30 days to arrive by ocean-going vessel to California. Furthermore, foreign-produced gasoline and marine vessels have been in short supply this year as countries have emerged from COVID lockdowns while demand increased. 

Access to crude oil is critical to refiners; it is the primary raw material used to make CARB gasoline and diesel. California domestic crude oil production has declined over time, and there are limited options to receive crude oil, given the absence of crude oil pipelines to deliver product into the state. In addition, the available marine terminals are at regulatory capacity, and the industry faces permitting hurdles to increase volume thresholds and the necessary storage tanks to build reserves. 

Additionally, the California summertime gasoline season extends beyond other portions of the U.S. As a result, when California is short of supply at the end of the summer season, gasoline and components needed to produce summer-time gasoline are typically more readily available from foreign producers. This further increases demand for marine vessels that have been in short supply and requires the use of congested marine terminals to acquire supply from the global market. Gasoline was scarce in the global market as many countries were emerging from COVID, and during September and October, several Asian refineries were also in maintenance; hence adequate international supply was limited. 

Chevron added their thoughts as well:

Many factors influence the price of gasoline, including several unique to California. In addition to the price of oil, other factors include the higher cost to produce gasoline to the specifications required by the California Air Resources Board, California having the highest effective tax rate (excise, sales, and other taxes and fees) on gasoline in the U.S., and the competitive conditions in the marketplace, which are impacted by policies that have reduced California’s refining capacity.

Only time will tell if Governor Gavin Newsom learns the basics of taxes and economics before the California legislative special session in December. If he doesn’t, Californian’s will eventually be feeling even more pain at the pump in the short term and long term. Utah taxpayers can be thankful that our elected officials have a firm grasp of economic reality.