New petroleum oversight boss questions the reasons behind the ... - The San Diego Union-Tribune

New petroleum oversight boss questions the reasons behind the spike in California gas prices - The San Diego Union-Tribune

New petroleum oversight boss questions the reasons behind the spike in California gas prices

Refineries issues, “unusual transaction” on spot market flagged as average price soars over $6 a gallon in San Diego

The director of California’s new Division of Petroleum Market Oversight has raised some questions about the surge in gasoline prices that has socked drivers across the state.

In a four-page letter sent Friday to Gov. Gavin Newsom and legislative leaders in Sacramento, Tai Milder pointed to the rising cost of crude oil but said, “Those increases do not fully explain the increase in everyday prices that Californians pay at the pump or the increasing differential from national average prices.”

Milder’s letter goes on to say his division’s review of recent data shows that refiners this summer “did not maintain adequate levels” of gasoline or did not import enough fuel “to sufficiently backfill production shortfalls.”

The recent run-up in prices has been partially blamed on planned and unplanned California refinery outages. The letter says the Division of Petroleum Market Oversight is reaching out to refineries to get additional information but added that prices have spiked “in a manner that does not appear to be completely explained even by these supply-and-demand fundamentals.”

Intriguingly, the letter also makes specific reference to what it called “an unusual transaction” on the California spot market in which gas prices rose 50 cents per gallon on Sept. 15, according to the Oil Price Information Service (OPIS), a private company that provides pricing information used for commercial contracts and trades on the fuels market.

The oversight division, the letter said, “is monitoring for any other potential trading irregularities, as well as gathering additional information from the parties to this transaction.”

The issues raised in the letter come as gas prices in California are soaring.

The average price for a gallon of regular in the San Diego area surpassed the $6 mark on Saturday, according to AAA of Southern California, and stood at $6.039 on Monday. That’s 17 cents per gallon higher than one week ago and 69 cents higher than last month.

A similar run-up in prices occurred last fall, when San Diego average prices reached an all-time high of $6.435 on Oct. 5, 2022.

Responding to complaints from Golden State drivers, Newsom last October called for a special session of the Legislature “to address the greed of oil companies” that are “ripping you off at the pump.”

Sacramento lawmakers in March passed the awkwardly named Senate Bill X1-2 that Newsom signed into law.

In effect since June 26, SB X1-2 requires the oil industry in California to produce much more data about imports, maintenance schedules and refinery profit margins. It also establishes a first-in-the-nation process to penalize oil companies if they exceed a “maximum gross refining margin” that will be set by the California Energy Commission.

Petroleum trade groups opposed the legislation, saying reporting thousands of transactions per day will increase costs but since the law went into effect, oil companies and refineries have worked with the energy commission to gather the data the legislation requires.

SB X1-2 also created the Division of Petroleum Market Oversight to monitor the oil and refinery industry. Milder, an attorney with experience in antitrust litigation, took the reins as director in August after being appointed by Newsom.

“The division will follow the facts,” Milder said at a media briefing earlier this month. “We will present those facts to the policymakers and, where appropriate, to law enforcement and to the public.”

The high price of gasoline in California

Gas prices in California have long been a source of frustration, controversy and even charges of conspiracy and price manipulation.

The Golden State has the highest prices of any state in the country. California’s statewide average Monday stood at $5.828, compared to the U.S. average of $3.849— a difference of nearly $2 a gallon.

California also has the nation’s highest taxes and fees charged per gallon.

Some of those costs are fixed while others vary by percentage but an analysis conducted in March 2022 by Stillwater Associates, a transportation energy consulting company in Irvine, reckoned that a combination of taxes and fees accounted for $1.26 for each gallon of gas in pumped California.

Included in those costs were an estimated 37 cents in fees the state has imposed for its cap and trade program and Low Carbon Fuel Standard to reduce CO2 intensity of transportation fuels.

To reduce air pollution, California produces its own unique — and expensive — blend of gasoline.

Another contributor to high gas prices is the fact that a major oil refinery for gasoline has not been built for decades.

In addition, California is vulnerable to price swings in the international crude oil market. In 2022, 59 percent of oil supply sources to the state’s refineries came from foreign imports, according to California Energy Commission data.

This summer, the price of Brent crude — the international benchmark in the futures market — has jumped from $71 in June to more than $90 after cuts in production by the Organization of the Petroleum Exporting Countries and a coalition of other nations that make up what’s called OPEC+.

The “mystery surcharge”

Even with all those factors at play, there appears to be an unexplained price differential in what California drivers pay when they fill up.

UC Berkeley economics professor Severin Borenstein has called it a “mystery surcharge” that dates to 2015.

In February of that year, an explosion at an Exxon Mobil refinery in Torrance knocked out about 10 percent of the state’s gasoline supply, driving up prices. After normal operations resumed, prices went down modestly but never completely returned to their pre-explosion margins.

Even after the state’s high taxes and fees are taken into account, Borenstein’s data show a “mystery surcharge” that has hovered around 35 cents per gallon for the past eight years. Over that time, that differential has been passed onto drivers in California to the tune of $50 billion, by Borenstein’s estimation.

“I have investigated all the obvious candidates — cap and trade, the Low Carbon Fuel Standard and the cost of producing our cleaner burning gasoline — and none of those explain it,” Borenstein said. “It’s a problem. There may be a benign explanation but it’s definitely not an obvious benign explanation.”

Borenstein is optimistic that Milder and the Division of Petroleum Market Oversight may help solve the mystery.

“I’m hopeful that he’s somebody who’s going to actually stick with it, get staff and they’re going to dig in,” he said.

Patrick De Haan, head of petroleum analysis at GasBuddy, a tech company that helps drivers across the country find the cheapest places to buy gas, said the 50-cent increase flagged on Sept. 15 did seem unusual but may be more indicative of a stressed California fuels market rather than somebody taking advantage of the situation.

“It’s interesting that politicians in California look at oil companies first without looking at their policies that create this,” De Haan said. “This is just Economics 101 for somebody who watches markets and sees the way prices move ... It doesn’t seem like there’s anything nefarious that I can see, other than the market is reacting to a perceived shortage in supply because of a tremendous amount of refinery snags right now.”

However, De Haan said the creation of the oversight division and SB X1-2 may help shine light and improve utilization rates of West Coast refineries.

“There’s such a lack of infrastructure today that the wholesale price of gasoline in LA is 53 cents a gallon more than it is in San Francisco,” De Haan said.

The Division of Petroleum Market Oversight is a branch of the California Energy Commission, which recently unveiled an interactive dashboard that breaks down the components that go into gas prices. The commission promises that more data will become publicly available as additional refinery and market information gets collected.

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