California is infamous for its steep gas prices, which are the highest in the country.
And in recent days prices have been spiking, with a gallon of regular unleaded crossing $5.30 on average in the Golden State compared to the national average of around $3.60.
Doug Johnson, a spokesperson for AAA Northern California, said Thursday the price of gas increased about $0.55 per gallon over a week, and was up $0.82 since February.
The cause of this spike is multi-faceted. “Some of that is the seasonal shift, we’re going from the winter blend which is cheaper to produce, to the summer blend that has more additives,” Johnson explained.
But other factors are also at play. Phillips 66 shuttered its Los Angeles-area refinery last year, citing concerns about long-term sustainability and market dynamics. Valero also plans to cease operations at its Benicia refinery next month.
A UC Davis study released last July said the two refineries make up approximately 17% of the state’s total capacity. Their closure could lead prices to rise by $1.21, “if no further significant changes happen in the market.”
Then came the war against Iran at the end of February. Iranian officials closed the Strait of Hormuz, cutting oil supplies by around 20 million barrels per day.
Severin Borenstein is the Faculty Director of the Energy Institute at UC Berkeley’s Haas School of Business. He spoke with Insight Host Vicki Gonzalez about the complicated picture behind rising fuel prices.
This interview has been edited for length and clarity.
Interview highlights
What are the factors that determine what we're paying per gallon?
Crude oil is a major factor, and the price of crude oil translates directly into the price of gasoline. Every $1 per barrel increase in the price of crude oil increases the price of the pump about two-and-a-half cents a gallon. Since the beginning of the war the price of crude oil was up about $30-$35 per barrel, and that translates to $0.75-$0.80 a gallon.
We haven't actually quite seen that much of an increase yet, so if the price of crude oil holds at that level, we may see a bit more driven by those higher prices of crude.
The United States announced it will release 172 million barrels of oil from its reserves as part of a broader international effort to combat rising prices. How significant is this solution for the long-term?
It's not viable for the long-term because there just isn't enough in inventory, and even in the short-term it's not going to replace what's actually going on. The blockade of the Strait of Hormuz is taking about 20 million barrels a day off the market. The fastest release we can realistically expect from the U.S. is probably two million barrels a day, and the rest from Europe and other parts is probably another two or three million barrels a day. A really optimistic view is maybe it could replace a quarter of the oil that has been taken off the market, but ultimately we can't just take it all out of inventory. More oil has to be produced.
California is a top-10 oil producing state in the country. How much do we make, and does it put us in a better position?
It does not put the state in a better position. California produces about a quarter [to a third] of the oil that we refine. It really doesn't matter when it comes to the price at the pump because there is a world-integrated oil market. And the oil companies are the first ones to say that when the price of oil goes sky high and gas prices go sky high, “we don't set the price of oil. That's set in the world market." That is true.
When the price of oil out of the Middle East, Venezuela, Mexico or many other sources goes up, the price of oil from California and Texas go up too. They charge the market price.
We should consider producing oil in California to the extent that it's economic, particularly after you've accounted for all the environmental issues associated with it. But we should not do it thinking this is somehow going to protect us from high prices at the pump. It doesn’t.
What are the ways increasing gas prices could ripple out across the state’s economy, especially amid an affordability crisis?
We've seen a big increase in income inequality in the United States over the last decade. Some people are doing just fine and paying an extra $20 or $30 a week at the pump, it’s not going to be a noticeable change in their standard of living. Other people are commuting long distances, really struggling to make ends meet, and it's a huge hit to those people.
I recognize that, but we have tried intervening in the oil and gasoline markets in the past and it has gone really badly. In the 1970s we tried regulating the price of gasoline. It was not the Arab oil embargo that caused those gas lines, it was the fact that the price of oil went up due to the oil embargo and we didn't let the price of gasoline go up. Refiners had much less incentive to produce [and] as a result, we got less gasoline than people wanted.
That didn't happen in 1991 with the first Gulf War. That didn't happen in 2006 with the run-up of crude oil prices. It didn't happen in 2014 [or] 2022 because when the price of oil went up, the price of gasoline was allowed to rise with it.
The record high average price in California for regular unleaded was $6.43 a gallon. Do you think we may flirt with that price at some point this year?
There’s two pieces we have to take apart. One is the price of crude oil. Right now the price of crude oil would have to go up another $40 a barrel or so to get us there, which is possible but that's not the most likely outcome at this point.
California has a separate problem. We’re losing a couple of refineries and we are going to be relying more on imports. Nothing wrong with that in itself, there are many states that don't even have refineries and import all their gasoline. But we have to make sure we have the facilities to actually manage those imports.
The pipeline and the storage capacity is a bigger concern for the possibility of huge price spikes right now. We're going through this transition; we lost one refinery last year, we're in the process of shutting down the Benicia refinery right now, and that does make us more vulnerable. That demands good California policy because that piece of it, unlike the crude oil piece, we can actually do something about.
We should have been getting out ahead of it a few years ago because we are going to lose refineries. When we decided to move to electric vehicles, everyone understood the demand for gasoline is going to go down. When the demand for gasoline goes down, refineries are going to have less demand to sell, and some of them will shut down.
Governor Gavin Newsom said earlier this year the Benicia refinery would still continue importing gas into Northern California even after it fully shuts down. Is that a sustainable strategy to keep stable prices?
It is eventually, but it's not enough to just have the Benicia refinery using its port capacity to bring in gasoline because we have to be able to store a lot more gasoline, and we don't have all the storage capacity we need. Luckily, we don't need as much crude oil storage capacity because we aren't refining as much. A lot of people are talking about converting the crude storage capacity to gasoline storage capacity. That's completely doable, but we have to make sure it actually gets done.
The California Air Resources Board is expected to consider changing the state's cap-and-trade program in May, potentially setting more aggressive emission limits. Chevron spoke to KCRA about it and said the vote could be the last straw that collapses the oil and gas industry. Could you expand on that?
Well, the oil industry has been telling us this story for years that everything will fall apart if we have a cap-and-trade program. When gasoline first went under the program in 2015, the highest ceiling on the price of the cap-and-trade allowances would translate to about $0.75 at the pump. So, the oil industry came out with an ad campaign saying, "this is going to raise your price $0.75 at the pump." And it didn't. The best estimate was it would raise it about $0.12 and it did.
What CARB is talking about would increase the price of gasoline. How much exactly it would increase, depends on how you model out these tighter standards, but probably the best guess is something like $0.25 a gallon. Not nothing, people will notice it. This is part of phasing out gasoline, and it's part of paying for our carbon emissions.
People don't like it and I would say three things about that. One is [to] shop around. California not only has very high gas prices, it also has much greater gas price dispersion across stations than the rest of the country. People just don't shop around as much here, and you can get a much better deal. Not only do you save money, but also you put more pressure on the high-priced sellers.
Second thing is if you buy a more fuel-efficient car, that's like cutting the price of gasoline. People don't really often think through the full cost to them of owning a car, including buying the gasoline, and I encourage them to. And then of course If you get an electric vehicle, there's a whole different set of problems that our electricity prices are too high, but it does protect you from the gyrations in the gasoline price.
You can hear more of this conversation, and from AAA Northern California spokesperson Doug Johnson, here.
