California oil refineries must stockpile gasoline to avoid price spikes, Gavin Newsom says

Governor Gavin Newsom said Thursday he will compel California oil refineries to stockpile additional fuel reserves in an effort to ward off price spikes, marking the latest move in his multi-year crusade against oil companies.

The governor’s plan directs the California Energy Commission to require petroleum refiners to maintain a minimum gasoline inventory in hopes of keeping supplies — and gas prices — stable even when refineries undergo maintenance.

According to Newsom, it’s those maintenance-caused periods of low supply that drove price spikes in years past. If this regulation had been in effect in 2023, his office said in a news release, drivers would have saved upwards of $650 million in gasoline costs.

“Price spikes at the pump are profit spikes for Big Oil,” said Newsom in media release. “Refiners should be required to plan ahead and backfill supplies to keep prices stable, instead of playing games to earn even more profits.”

The move immediately provoked backlash from representatives of California’s oil industry, who called the governor’s claims that oil refineries intentionally planned maintenance during busy driving seasons are “purposely misleading” and not rooted in fact.

“To impose new operational mandates on energy producers based on such falsehoods is regulatory malpractice, and ignores the logistical challenges and costs associated with such a plan,” said president and CEO of the Western States Petroleum Association Catherine Reheis-Boyd.

The governor’s office pointed out that Australia, Japan and the European Union have all passed regulations requiring major fuel refiners to maintain reserves of gasoline, diesel or crude oil products.

The rule, which would have to be issued by the CEC, regulation has its roots in a summer 2022 price spike that sent lawmakers into a special legislative session to address what Newsom called “price gauging” at the pump.

At the time, average fuel costs rose to a sky-high $5.52 a gallon.

Senate Bill X1-2 was signed by the governor in spring of 2023, which established a watchdog division within the California Energy Commission to investigate unexplained gas price spikes. Newsom appointed Tai Milder as the state’s ‘oil czar’ to oversee the effort.

In September, Milder highlighted a suspicious trade on the state’s real-time market for gasoline that quickly caused a 50-cent-per-gallon price spike. And early this year, he recommended imposing minimum gasoline storage requirements for refiners.

“It appears that spot market volatility, illiquidity, and lack of transparency may all be contributing to and exacerbating price spikes during periods of under-supply and refinery maintenance,” Milder wrote in a February letter to the governor.

Newsom’s new refinery rules underscore his administration’s agreement with Milder’s analysis: Gas price spikes happens when refineries undergo maintenance without adequate levels of inventory in stock, reducing supply and driving up prices.

Under the plan, Newsom said refiners would be required to show resupply plans to the CEC and prove they are adequate to cover losses from refinery maintenance. Refiners would face penalties for failure to comply, according to the proposal, which go into a fund and be “distributed to consumers.”

Today a gallon of gasoline in California today costs $4.61 on average, just over 10 cents lower than the last month and more than 50 cents lower than last year, according to the latest prices from AAA.

Severin Borenstein, director of the Energy Institute at UC Berkeley’s Haas School of Business, noted that the CEC will have to work out key details — including when the stockpile gasoline gets used and when refineries have to resupply.

“I think this will be helpful during the occasional price spike,” said Borenstein. “But if the idea is, suddenly we’re going to have gas prices in line with the rest of the country after you account for taxes and fees, that’s not going to happen.”

Nonexistent reserves and planned maintenance does not necessarily mean market manipulation, he added. But he said the bigger mystery is why — even after taxes and fees are accounted for — California gas prices here remain higher than the rest of the country.

“If you look at why Californians pay too much for gasoline, the price spikes aren’t most of it,” said Borenstein. “Most of it is in the month in, month out mystery gasoline surcharge that we shouldn’t confuse with the once a year or two years price spike.”

This story was originally published August 15, 2024 at 2:09 PM with the headline "California oil refineries must stockpile gasoline to avoid price spikes, Gavin Newsom says."