Here’s what Gavin Newsom’s switch to a cheaper fuel blend means for California gas prices
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Here’s what Gavin Newsom’s switch to a cheaper fuel blend means for California gas prices
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California gasoline prices have shot into near-record territory because of production-capacity problems at the state’s refineries — but prices may be peaking already and will likely start falling in the next few weeks.
Gov. Gavin Newsom’s decision last week to accelerate the seasonal switch to cheaper, winter-blend fuel will bring prices down by about $1 a gallon over the course of the month, said Dave Hackett of Stillwater Associates, an industry consulting firm in Irvine.
“This will take steam out of the spot market,” Hackett said of Newsom’s decision. “That’ll probably pop the bubble.”
Severin Borenstein, an energy economist at UC Berkeley, said he believes the relief won’t come immediately. Wholesale prices appear to have peaked over the weekend, and retail prices should start creeping downward. But motorists won’t see meaningful changes right away.
“It’ll be a couple of weeks, probably closer to a month, before we see a significant drop,” he said.
The early switch to winter fuel could increase California’s smog problem, although it’s not clear by how much. Environmentalists say they’re dismayed by the governor’s announcement.
California prices, far and away the highest in the nation, have risen 58 cents a gallon in the past week and $1.14 in the past month, according to AAA Fuel Gauge. The current average of $6.38 for self-serve regular is just 6 cents shy of the all-time record, set in mid-June, after Russia invaded Ukraine.
Newsom has resisted calls, mostly from Republican lawmakers, to roll back the state’s 54 cents-a-gallon excise tax on gasoline. But last week he did propose a windfall profits tax on oil companies in California, with the proceeds to go to taxpayers by way of some sort of refund or rebate. Details of the proposal have yet to be fleshed out; nor is it clear how soon the tax would take effect if the Legislature approves it.
Gas prices surged earlier this year when Russia’s invasion caused crude oil prices to soar to $120 a barrel. Russia is one of the world’s leading oil producers, and crude prices are the leading factor in setting gasoline prices.
This time is different — although the distinction is probably lost on motorists struggling to fill their tanks. In recent months crude prices have come down to around $80 a barrel. But refiners haven’t been able to keep up with the demand for finished gasoline.
Gasoline inventories in late September were 28% below what they were in July, according to data kept by the California Energy Commission.
“Gas inventories are at their lowest point over the last decade,” said Lindsay Buckley, a spokeswoman for the commission.
Refineries’ gasoline production has fallen in California
What’s happened? When prices started moving up last spring, many refiners postponed their regular maintenance in order to produce flat out. Now, though, the refiners are dialing back their production so they can catch up on their maintenance, Hackett said.
The Oil Price Information Service, a market consultant owned by Dow Jones said major California refineries, including Phillips 66 in Los Angeles and Valero in Benicia, have begun maintenance projects in the past two weeks. OPIS also reported that “a power-related issue” has hit Chevron’s Richmond refinery.
Refiners “are having problems all over the country,” Hackett said.
California’s prices are almost always higher than the U.S. average, due in part to its unique blending requirements — designed to reduce air pollution — and high taxes. In June, when prices peaked nationally, the differential was $1.42 a gallon, according to AAA.
But now the gap has simply exploded, and Newsom’s administration isn’t buying the industry’s explanations.
David Hochschild, chairman of the Energy Commission, sent refinery executives a letter last week noting that California’s average prices are $2.50 above the national average.
While the commission is aware of maintenance work and unplanned outages, “those events alone to not adequately explain the significant increase in retail prices in California,” Hochschild wrote.
“The oil industry owes Californians answers.”
Officials with the Western States Petroleum Association, the industry’s lobbying group in Sacramento, couldn’t be reached for comment.
In the meantime, the governor directed the California Air Resources Board to allow oil refiners to start producing winter-blend gasoline right away, instead of waiting until Nov. 1 as usual.
Hackett said this will enable refiners to start adding butane to California gasoline — a move that could boost supplies by around 10%. That’s significant, he said.
“Ten percent is like adding a refinery to the mix,” he said.
The early switch isn’t unprecedented. Borenstein said former Governors Arnold Schwarzenegger and Jerry Brown issued similar orders. According to Newsom’s office, Brown’s decision in 2012 led to a 47-cents drop in gas prices within a month.
Will Newsom’s move mean more smog?
Air quality is the reason why butane isn’t used year round. In warm weather, butane causes gasoline to evaporate, and that causes smog. Hackett said using butane in October shouldn’t cause that much of a problem.
“It’s going to be warm in the next few weeks but it’s not going to be hot,” he said.
Environmentalists aren’t convinced.
“We’re still in the smog season,” said Bill Magavern, policy director at the Coalition for Clean Air, a Sacramento lobbying organization. “Those (blending) requirements are there for a reason.
“We don’t think they should be sacrificed for what may not be noticeable relief in the price.”
This story was originally published October 4, 2022 at 6:00 AM with the headline "Here’s what Gavin Newsom’s switch to a cheaper fuel blend means for California gas prices."
