Nearly five months after Gavin Newsom initially called for a penalty on excessive oil company profits, the governor and lawmakers in Sacramento appear no closer to deciding how to prevent the kind of gas price hikes that Californians experienced ‘last year.
At the first legislative hearing on the governor’s proposal at the state Capitol Wednesday, lawmakers shared concerns about the potential unintended consequences of his desire to limit industry earnings.
Some oil market experts said Newsom’s idea to limit oil refinery profits would not solve the problem, with one calling it a “fiscal gimmick.” Other economists agreed with the Newsom administration in demanding more transparency from oil refineries on pricing, maintenance, supply contracts and inventory.
“I know lawmakers don’t want the answer, ‘We need more research,’ but the fact is, shooting first and then figuring out if it’s the right solution is probably going to be as harmful as it is helpful,” Severin Borenstein, director of the Energy Institute at UC Berkeley’s Haas School of Business, told lawmakers.
Lawmakers and many experts who testified Wednesday agreed with Newsom that something should be done to prevent oil companies from charging Californians more than drivers in other states, a spread that peaked in October when prices in the state were 2.60 dollars above the national average, while corporations make billions in profits. Polls conducted by Newsom’s policy advocates found that 6 in 10 Californians support a penalty to raise prices at oil refineries when gas prices reach abnormally high levels.
But the hearing underscored the challenge Newsom has faced since he began talking publicly about penalizing the industry before he had a detailed plan to execute it: Solving the problem is even more complicated than it seems.
Newsom’s push to limit oil industry profits comes as the governor faces a high-profile battle with the industry, which he has accused of intentionally raising prices on Californians as payback for the effort of the state to curb the use of fossil fuels. The oil industry argues the consequences of these policies and the state’s reliance on a small number of oil refineries drive up gasoline costs.
Catherine Reheis-Boyd, president and CEO of the Western States Petroleum Assn., described the governor’s plan as a misguided policy that “focuses on profits, rather than the root cause of price increases, which is the lack of of offer”.
“These supply constraints, coupled with demand driven by the world’s fourth-largest economy and 35 million internal combustion engine vehicles, even as we adopt more [electric vehicles]are the main drivers of fuel costs in the state,” Reheis-Boyd said.
Newsom called for quick passage of a penalty on oil company profits to ease financial pressures on working families when he announced the October special session. At the time, prices were over $6 per gallon. Now, prices have dropped to $4.74 a gallon, while steep increases in home heating bills are a growing concern, showing the Legislature’s difficulty in quickly addressing Californians’ top concerns.
The governor did not attend Wednesday’s news hearing and instead traveled to Palo Alto, where he joined Elon Musk as the Tesla CEO announced his company would open a new global engineering headquarters in California . Newsom did not mention the hearing, the special session or his proposed sanctions on oil companies in a video of the event Musk shared on social media.
Newsom’s predecessor, Gov. Jerry Brown, testified on rare occasions before the Legislature in support of proposals he championed, including 2011 pension reform, the gas tax and the extension of the cap and trade in 2017. Often described as a bit of a politician, Newsom has not participated in a legislative hearing since taking office in 2019.
When asked last week, Newsom said imposing a cap on oil refinery profits is challenging, in part, because it’s largely uncharted territory in California and the rest of the country.
“No other state in history has done that,” Newsom said.
The Democratic governor also highlighted the lack of transparency of oil refineries. The state’s largest oil refiners declined to participate in an earlier hearing on gas prices held by the California Energy Commission. Newsom said the state would “fight like hell to make sure information is provided so they can’t game the system.”
“And once we figure that out and we’re in the process of doing that, we’ll be able to fill in those blanks about what everybody apparently wants to see,” Newsom said.
His administration officials shared the same concerns with lawmakers on Wednesday.
“We’re at a point where I think we need to go beyond the voluntary sharing of information and start using the authority of the state to get the information you need to make informed policy decisions,” Nicolas said Maduros, director of California. The Department of Tax Administration and Taxes, told the audience.
State Sen. Dave Min (D-Costa Mesa) said he was concerned about the governor’s proposal and saw no “smoking gun” at the hearing. But he also said the state’s oil market is broken if the industry is able to make record profits while Californians pay “ridiculously high” gas prices.
“We need to fix this and I think we need answers and accountability here because I don’t know where the blame lies,” Min said.
Jamie Court, president of Consumer Watchdog, agreed that more research should be done to detail the unexplained surcharges, largely at the retail end of the supply chain, but argued that lawmakers should not let the ‘opportunity to also limit the profits of oil refineries.
“This is the first time the Legislature has focused on why Californians are paying so much more for our gas and what tangibility can be done about that with a penalty for doing that,” Court said in an interview. “Any legislation that doesn’t have a windfall penalty and cap would be a failure.”
