California’s crusade against energy production is kicking into high gear with a series of bills, lawsuits, and new laws that threaten to send prices even higher across the Golden State.
It’s no secret the state’s hostility towards oil and natural gas has already led to the highest gasoline prices in the country, rolling blackouts, increased foreign imports to keep the state running, and made investments in oil and natural gas production and refining increasingly risky.
However, it does not appear there will be any relief from the Newsom administration on the horizon.
The state gas tax is slated to increase later this summer, while the California Energy Commission is actively considering new profit caps for refiners that will invariably raise costs for consumers. Gas prices have recently jumped more than 50 cents over the last year in California, with LA residents now paying a staggering $6.29 per gallon. New emissions regulations under consideration by the California Air Resources Board, according to recent reports, may send prices another 47 cents higher by 2025.
The climate “Superfund” tax on energy producers under consideration in the state legislature adds an additional cost driver that could hit consumers just as the summer driving season kicks off, while the Newsom administration’s climate lawsuit against energy producers poses a growing threat to consumers struggling with soaring energy costs.
Caps On Refining Profits Likely Will Not Spare Consumers From Superfund Tax
Proponents of so-called Superfund legislation, which would institute a one-time tax on energy companies over alleged climate damages, appear acutely sensitive to the reality that consumers will inevitably be impacted by the increased costs the tax will place on energy producers.
However, Sen. Caroline Menjivar of LA’s San Fernando Valley, the sponsor of California’s “Superfund” bill SB-1497, told the Senate Environmental Quality Committee recently the state’s so-called anti-gas price gouging law SBX 1-2 will prevent the Superfund tax from impacting gas prices:
“And like I mentioned with the amendments, it clarifies that this does not include utility companies. It won’t pass down to consumers because we in the legislature just last year passed SBX 1-2 that prevents price gouging. So with this in place and SBX 1-2, it won’t bring down the cost to consumers.”
These comments from Sen. Menjivar raise significant questions about the Superfund tax’s potential interaction with SBX 1-2, which was signed into law by Gov. Gavin Newsom last year.
SBX 1-2 empowers the California Energy Commission to procure additional cost data from refiners and introduce arbitrary caps on refining margins. Nothing in SBX 1-2 appears to prevent refiners from pricing in new taxes and regulatory costs, which already amount to nearly $1 per gallon, into the price of their products.
History Shows Price Controls on Energy Producers Drive Costs Higher
While SBX 1-2 likely won’t shield consumers from the Superfund tax, history shows profit restrictions imperil energy producers’ ability to meet consumer needs during spikes in demand. The state of Hawaii abandoned a similar scheme after only one year in 2006 after price controls resulted in higher prices and gasoline shortages on the island. Likewise, margin caps in California could have dire consequences for the few refineries still operating in the state, according to industry experts:
“Andy Lipow, president of Lipow Oil Associates, said the law’s requirements ‘may lead some gasoline importers to halt doing business in the state and that could exacerbate the supply situation at exactly the same time supplies from outside the state are needed.’”
Bipartisan Divide With Newsom Over Refinery Profit Caps
Gov. Gavin Newsom again this week accused oil companies of gouging consumers amid recent price spikes at the pump, but a recent hearing on the implementation of SBX 1-2 before the California Senate Energy Committee indicates a growing bipartisan divide on the issue of gas prices.
Newsom, speaking to reporters this week in Ontario, said he was “pissed off … about being ripped off by the oil companies. And that’s all it is, they’re ripping you off because they can rip you off.”
However, Newsom’s own regulator admitted to the state Senate Energy Committee last week there is no clear evidence that oil companies are engaging in price gouging. Sen. Josh Newman, a Fullerton Democrat, put the question to Siva Gunda of the California Energy Commission directly:
SEN. JOSH NEWMAN: I guess to net margins generally, my understanding is correct me if I’m wrong, that your assessment so far did not indicate any clear evidence of price gouging in this marketplace is that correct?
SIVA GUNDA: Yeah.
Despite the lack of clear evidence on price gouging, Gunda reiterated the body is considering a profit “cutoff” that may be proposed by the end of this year.
Inglewood Democrat Sen. Steven Bradford, Chair of the CA Senate Energy Committee, called on the Newsom administration to exercise caution on the question of energy price controls. CalMatters reports:
“We want to have the confidence that the solutions will bring relief to Californians at the pump are real and not just aspirational,” said Sen. Steven Bradford, an Inglewood Democrat and chairperson of the committee. “Far too often, we shoot first and ask questions later.”
Catherine Reheis-Boyd, President of the Western States Petroleum Association, similarly warned arbitrary profit caps will not achieve their intended effect when it comes to prices at the pump. As CalMatters reports:
“[Reheis-Boyd] told CalMatters that they wouldn’t reduce prices, but have ‘the absolute opposite effect.’ To avoid incurring penalties on profits, companies will restrict supply, which will drive up costs.
‘It’s two to three times more expensive to run a refinery in California than anywhere else in the world. It comes to a point where it becomes uneconomic,’ Reheis-Boyd said. In 2023, California had 14 refineries compared to 43 in 1982.
“Instead, Reheis-Boyd argues that legislators should look into investing more into the oil supply chain to increase supply, such as lifting restrictions on the production of crude oil in California.”
Newsom Admin Says Taxpayer-Funded Refineries ‘On the Table’ If Profit Caps Drive Oil Companies Out of California
Should a potential profit cap cause producers to redirect investment and ultimately shutter refineries, the California Energy Commission bluntly told the state Senate Energy Committee last week the state could be forced to consider “extreme options,” including state-run oil refineries:
GUNDA: … if those go down, some extreme options might be on the table as a state. For example, what, Australia is doing after COVID, a number of refineries went out of business in Australia and the Australian government stepped in to subsidize and hold some of their refineries. So those are the things that might be on the table.
If the example of Australia is any indication, such a scenario could cost California taxpayers billions. Australia, a country with two thirds the inhabitants of California, authorized $1.6 billion USD of taxpayer subsidies to keep two refineries in business following COVID demand shocks in 2021.
Duplicative CA Climate Suit Could Also Send Gas Prices Higher
Like the Superfund tax and the CA Energy Commission’s potential margin caps on refiners, the California public nuisance lawsuit against energy producers threatens to hit consumers at the pump. The Newsom administration’s suit seeks to establish an Abatement Fund that Calif. Attorney General Rob Bonta says, much like SB 1497’s Superfund, will seek to recover billions from energy producers.
As EID discussed previously, this barrage of overlapping and conflicting actions out of Sacramento is not accidental. Activists financing the push for Superfund legislation across the country are using these bills to hedge their bets as their public nuisance suits face an uphill battle in court.
While California’s lawsuit faces an uncertain path, even plaintiffs concede the case could put pressure on gas prices. Bonta himself refused to rule out the possibility that the case could send prices higher in an interview with FOX LA shortly after the suit was filed:
ELEX MICHAELSON: A lot of people are concerned their gas prices could go up because of this, what do you say to that?
ROB BONTA: We are protecting folks in California, including those who pay for gas. I don’t know what the impacts will be of our effort to hold big oil accountable, but it must end.
Bonta recently told Politico he hopes the suit will proceed to trial in the next three years, but California consumers could very well be on the hook for an early preview at the pump if Newsom signs Superfund legislation into law this year.
Higher gas prices resulting from a Superfund tax or the Newsom’s barrage of anti-energy policies just in time for the summer driving season could have significant impacts on struggling families, as KPMG Global Clients & Markets Head Regina Mayor recently told Yahoo Finance:
“I understand people need to drive their cars to get to and from work and to pick up their children and take them to school and things of that nature. However, they might think twice about driving over the summer holiday if gas prices reach a level that they deem unacceptable,” said Mayor.
Bottom Line: With summer fast approaching, California’s war on energy is poised to send gasoline prices higher, adding financial strain on already stretched consumers. Policymakers would be wise to consider measures that would increase energy supplies to drive down prices, instead of pursuing misguided taxes, profit caps, and lawsuits that will only cause more pain at the pump.
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