I’ve been wondering for some time why gasoline prices in California are so much higher than in other parts of the country. I know that gasoline taxes are much higher, and they account for the bulk of the difference in prices, but there’s a large portion unaccounted for. A recent Wall Street Journal news story does a nice job of explaining. It’s Jinjoo Lee, “A $1.23-a-Gallon California Mystery,” Wall Street Journal, January 21-22, 2023.
First, higher taxes and fees:
There are some quantifiable sources of the California premium. Higher state gas taxes are one reason. The state’s clean air policies are another. These include a cap-and-trade program for greenhouse-gas emissions, a low-carbon fuel standard and a fee for the abatement of leaking underground storage. California also mandates a cleaner-burning gasoline, which adds around 10 cents a gallon.
Tally all of those California-specific costs up, though, and it comes out to about $1.09 a gallon, or 80 cents more than what the average state gas tax is elsewhere in the U.S., according to calculations by Prof. Severin Borenstein at the University of California Berkeley’s Haas School of Business, based on the monthly average for December 2022. But that still leaves a 43-cents-per-gallon difference not explained by California-specific tax and air policy-related costs. Mr. Borenstein was a member of a committee that the California Energy Commission assembled in 2014 to better understand fuel-price fluctuations.
The article notes that the 43-cent difference doesn’t seem to be going to the refineries. So who gets it? Owners of gasoline stations. But why doesn’t entry of other gasoline stations drive this differential much lower? Regulation.
In case you haven’t noticed, California’s state government is trying to get rid of gasoline-powered vehicles in favor of electric vehicles. The California Air Resources Board (CARB) has stated that starting in 2035, no new gasoline-powered cars will be allowed to be sold in California. My guess is that there will be a massive demonstration against this regulation as we get closer to 2030. Nevertheless, with the subsidies to EVs and with the interim restrictions [see the graph in this link for the percentage by year] on the percent of gasoline-powered vehicles that will be allowed to be sold, a rational investor would expect a shrinking market for gasoline. Combine the shortened time period in which to make a return on investment in a new gasoline station with the difficulty of getting new gasoline stations approved in California, and the result is not much entry. Ergo, higher profits to gasoline stations.
Bonus question: Which California governor signed the law creating the California Air Resources Board?
READER COMMENTS
Dylan
Jan 29 2023 at 9:26am
I don’t have access to the WSJ, but I’m curious if the article also digs into why Oregon and Washington’s gas prices are nearly as high as California’s (at least they were a month or two ago when I last checked) even though they don’t have the same policies?
Monte
Jan 29 2023 at 9:54am
Why…none other than the Gipper himself! Ronald Wilson Reagan, circa 1967.
TMC
Jan 30 2023 at 8:56am
Not unlike Nixon’s creating the EPA. Good ideas that get bastardized. Back then one of the major things LA was know for was its smog.
Scott Sumner
Jan 29 2023 at 11:38am
I think this is basically correct, and if anything understates the problem. For instance, you say:
“I know that gasoline taxes are much higher, and they account for the bulk of the difference in prices,”
But is that correct? California gas taxes (state level) are about 54 cents a gallon, so that’s about 25 cents higher than average. But I notice a huge gap in the price at the pump—one to two dollars. So isn’t it mostly regulation, not taxes?
David Henderson
Jan 29 2023 at 12:13pm
You write:
You’re basically right. I was lumping together cap and trade, which is a form of regulation, the fee for underground storage, and the requirement for cleaner-burning gasoline. I probably shouldn’t have.
Scott Sumner
Jan 29 2023 at 7:38pm
OK, that makes sense.
Earl Richards
Jan 29 2023 at 1:18pm
In 2022, Big Oil made $200 billion. Taxes are not responsible for these excessive profits.
Jon Murphy
Jan 30 2023 at 7:33am
Increasing demand with pretty inelastic supply is more what contributed to profits. But that is beside the point. The post is looking to explain the relatively high gasoline prices in California and the factors there.
Earl Richards
Feb 3 2023 at 8:05am
Big Oil operates in California.
Jon Murphy
Feb 3 2023 at 8:17am
And outside California. Is Big Oil just greedy inside California?
Bobster
Jan 30 2023 at 1:11am
LA Times wrote a pretty good article on the situation that demolishes the claim by some that it’s price gouging.
https://www.latimes.com/california/story/2022-10-08/why-are-california-gas-prices-high-and-supplies-unstable
MarkW
Jan 30 2023 at 7:40am
It will be interesting to see how this plays out in California. It’s hard to open new gas stations, but that fact makes existing stations more profitable, so they seem less likely to close. Though with 2035 looming, perhaps it still will no longer make sense to make major capital investments (as when pumps or underground tanks need to be replaced) and stations will close anyway. Will demand for gas drop substantially in coming years due to EVs? Or is EV market share going to expand more slowly than expected (and required)? Will the 2035 deadline even hold? The crunch is going to come much sooner than 2035 — 38% of vehicles sold must be EVs by 2026 and 68% by 2030. What if these near-term targets are not met? And why crazy things will California’s left-wing government do if things don’t go to plan?
TMC
Jan 30 2023 at 8:58am
If it’s price gouging then the effect should still be there over the border to other states. If it’s regulation, the effect should be gone.
Jon Murphy
Jan 30 2023 at 2:09pm
Not necessarily. Gasoline stations are independently owned and operated. They all set their own prices. If it were price gouging, unless there was a large chain owned by the same individual, we wouldn’t expect to see the effects across state lines (or even at different stores).*
*Unless, of course, there is a collusion agreement in place.
TMC
Jan 30 2023 at 5:05pm
The conditions for gouging would be the same on either side of the border, as customers can cross the street to get a better price if they wish. It’s only regulation that stops at the border.
Border studies are done precisely for this reason – to isolate one variable that can’t cross the border from all the others that can. Remember, we’re talking stations very close to each other.
Jon Murphy
Jan 30 2023 at 8:47pm
I understand the use of border studies. I’m saying you cannot show price gouging with them. You need something other than that.
Joseph V Smith
Jan 31 2023 at 7:05pm
Here is what I posted at the WSJ at the end of the article Dave wrote about:
Joe to WSJ Jan 21, 2023:
I have family that lives in Phoenix AZ. I believe AZ gasoline prices are also higher than what I would expect based on prices in Texas where I live. AZ gets its gasoline through two pipelines, one in California near Los Angeles and one in ElPaso TX. Since the state excise gas tax in AZ (18 cents) and Tx (20 cents) is about the same, I have never been able to figure out what accounts for the difference between gas prices in TX and AZ. Today AAA average price data shows AZ at $3.45/gal and TX at $3.017.. CA is at $4.436/gal.
21 January, 2023 later in the day:
This link might offer relevant data: https://torrancerefinery.com/article/california-gas-prices-explained/
According to the article at this link here is a list of all taxes on gasoline in California as of March 2022;
State excise tax $.51 (now $.53.9 I believe)
Federal excise tax $.18.4
Low carbon fuel standard $.22
Cap and Trade $.25
State and Local sales tax $ .12
State Underground Storage tax $.02
Total about $1.30 to 1.33
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