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In California, There has Been a Substantial Increase in Gasoline Prices in Recent Years

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By Staff Middle Land

July 23, 2024
6:24 pm
Los Angeles, CA

By Lee Ohanian So Why Won’t Newsom Put His Foot on the Brakes? In 2012, the price of regular-grade gasoline in California was about 30 cents per gallon higher than the national average. This price differential has increased substantially in recent years. Last week, the price of regular gas was nearly $5 per gallon—about $1.50 per gallon higher than the national average. Last month, Wall Street Journal editorial writer Allysia Finley wrote about California’s expensive gasoline and how it also harms drivers in Arizona and Nevada, states which import most of their gasoline from California and where gas prices are also considerably higher than the national average. Finley’s article described California’s high prices as the consequence of its high gasoline taxes, its low-carbon-content fuel blend—which is produced only in

By Lee Ohanian

So Why Won’t Newsom Put His Foot on the Brakes?

In 2012, the price of regular-grade gasoline in California was about 30 cents per gallon higher than the national average. This price differential has increased substantially in recent years. Last week, the price of regular gas was nearly $5 per gallon—about $1.50 per gallon higher than the national average.
Last month, Wall Street Journal editorial writer Allysia Finley wrote about California’s expensive gasoline and how it also harms drivers in Arizona and Nevada, states which import most of their gasoline from California and where gas prices are also considerably higher than the national average.

Finley’s article described California’s high prices as the consequence of its high gasoline taxes, its low-carbon-content fuel blend—which is produced only in California, South Korea, and New Brunswick, Canada—its cap-and-trade carbon emissions program, and its refinery capacity, which has declined substantially. It is no surprise that California’s gas prices are high given low production capacity, high taxes and regulations, and a more than doubling of cars on the road over the last 40 years.

Newsom published a response to Finley in the Wall Street Journal claiming the reporter’s argument that California policies contribute to higher prices was “an election-year stunt” and that “a deeper examination . . . reveals a complete misunderstanding of how California’s policies protect consumers at the pump.”

There is absolutely no doubt in my mind that California’s unique fuel blend, high gas taxes, and regulations —ranging from its cap-and-trade program to its refusal to permit new drilling and refining capacity—have driven prices higher. These are explicit choices California has made in its quest to be the state with the most aggressive climate change policies, including Newsom’s executive order that bans the sale of new fossil-fuel-powered cars and trucks by 2035.

The tried-and-true way to reduce the consumption of a good is to raise its price. And California has not only done that but will likely keep doing it in future years. California gas prices could rise an additional 50 cents per gallon in 2025 if the California Air Resources Board approves a plan to further reduce the carbon content of California’s gasoline blend.

Moreover, California is considering implementing a “price-gouging penalty” based on gross margins, which is the price difference between the price of crude oil and wholesale gasoline prices. Note that gross margins do not cover labor costs, and thus it makes no sense to tax at this level. The state would call this fee a “penalty” rather than a tax, because raising taxes in California requires a supermajority within both legislative houses. A supermajority among Democrats exists in both houses, but such a tax would be unpopular among voters and would cost them constituent support if they were to vote for it.

Nevada governor Joe Lombardo recently wrote to Newsom expressing concerns about high gas prices in Nevada and asking that California not implement further policies that will drive gas prices higher. Lombardo wrote, “Since 88% of Nevada’s fuels are delivered via pipeline and truck from refineries in California, it’s no surprise that California’s fuel policies significantly impact the costs and availability of fuel for Nevada’s residents and businesses.” He closed by requesting that Newsom consider the impact of his policy choices on Nevada and other western states.

Newsom responded as follows: “This is a stunt to appease Governor Lombardo’s Big Oil donors, who contributed tens of thousands of dollars to his campaign. He’s parroting their talking points, and he knows full well that oil refiners are driving up gas prices and making massive profits—harming residents of both of our states. Price spikes are profit spikes, and California is holding Big Oil accountable.”

Newsom’s response is surprising not just for its lack of civility but also because there may be no sitting governor who has benefited more from “Big Oil donors” than Newsom, whose early business ventures were supported by Getty oil money through his father’s business connections.

Now, suppose that “Big Oil” was indeed making massive profits in California. If this were the case, then those profits should incentivize new production, which in turn would lower prices. But California’s policies have prevented this. The last gasoline refinery built in California was in 1969. Since the early 1980s, California’s gasoline-refining capacity has dropped by about 32%.

Moreover, those massive profits Newsom alleges may not be so massive after all. Two gasoline refineries are currently being converted to plant-based biodiesel fuel production, because biodiesel is more profitable to produce than gasoline due to federal and state clean energy subsidies. These subsidies, which support California’s commitment to renewables, are reducing capacity further, which in turn are increasing gas prices.

Within several hours, readers of Newsom’s response posted 152 comments. Now, Newsom is no crowd favorite of the Wall Street Journal’s readership, and while most comments on the newspaper’s articles express viewpoints in support of the free market and small government, there are typically comments from a range of political perspectives. But not this time. Of the 152 comments, all 152 were critical, nearly all for obvious economic reasons.

To deny that high taxes, a unique fuel blend that is more costly to produce and that sometimes needs to be imported from other countries, and lower productive capacity results in higher prices is inconsistent with standard economic reasoning. And implementing additional regulations such as a price-gouging penalty and even lower carbon content fuel will increase prices further—not just for Californians, but for Nevada and Arizona drivers too.

Original Article: Hoover Institution