25/ Apr’19

California’s high gas prices shouldn’t be a mystery

How high will gas prices go this summer?

GasBuddy Head of Petroleum Analysis Patrick DeHaan on the outlook for gas prices.

When gasoline prices start to rise the best thing a politician can do is blame the oil companies. California Gov. Gavin Newsom, in office just over 100 hundred days, seems to be quickly learning that.

California drivers are paying an average $4.03 per gallon, which is more than $1 per gallon higher than the national average, according to AAA data. With prices hitting the highest level in 5 years, Newsom this week asked the California Energy Commission for an analysis of the state’s gas prices by May 15.

It seems higher California gasoline taxes, stricter environmental regulations, refinery outages and recent floods in the Midwest that caused shortages of ethanol (a main component in California petrol) won’t cut it for Newsom. No, he wants to look beyond those factors and try to blame the oil industry for what he labels potentially “inappropriate industry practices.”

The governor is pointing to analysis that suggests Californians are paying a mystery surcharge compared to other states that cannot be explained by higher taxes and costs. In 2017, the state's Petroleum Market Advisory Committee found that since 2015 California has had “a continuous and significant unexplained differential compared to the rest of the country,” and for the life of them they just can’t figure it out.

So if you can’t figure it out, a safe political move is to blame oil companies. But in reality, there could be any other reason for the price difference.

One of the reasons is rising gasoline demand at a time when California refining capacity has been restrained. Even with California being one of the leaders in electric cars, gasoline is still the most used transportation fuel in California, with 97 percent of all gasoline being consumed by light-duty cars, pickup trucks and sport utility vehicles. That growing gasoline demand has made it very difficult for California refiners to keep up.

California has a geographical disadvantage when it comes to piping in crude oil and gasoline due to the fact that they are cut off from the rest of the country by mountains. That forces more of their oil and gasoline supply to be brought in by ships, which costs more. Other states that are west of the Sierra Madre mountain range are also seeing higher gas prices than the states east of the range. It also means that California is more dependent on local refineries.

In fact, in 2015 when the mysterious and “continuous and significant unexplained differential compared to the rest of the country” began a major explosion and fire occurred at the former ExxonMobil refinery in Torrance, California. That refinery outage was so major that California gas prices have never been the same since.

So if Newsom is really interested in the reason for California’s high gas prices, he should encourage the state to build new Californian refineries. He may also want to rethink his position on offshore oil drilling and fracking.

Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com.