Newsom pushes through a bill that penalizes oil companies for “price-gouging.”
California lawmakers voted on Thursday to advance a bill that would penalize oil companies for “price gouging” — a first-of-its-kind legislation pushed forward in recent months by Gov. Gavin Newsom (D).
The SBX1-2 bill, sponsored by state Sen. Nancy Skinner (D), received the approval of the California State Senate in an Extraordinary Session convened to fast-track the legislation on Thursday morning.
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The bill could head to the State Assembly as early as Monday and receive the governor’s signature shortly after that, a source familiar with the matter told The Hill.
The bill would authorize the State Energy Resources Conservation and Development Commission to set a maximum gross gasoline refining margin — and then establish a penalty for any California-based refineries that exceed that margin. The Commission would be required, however, to consider a refiner’s request for an exemption from that maximum margin.
This is from Sharon Udasin, “Newsom gets big win: California Senate approves first-of-its kind ‘price gouging’ bill,” The Hill, March 23, 2023.
This has the whiff of price controls although it’s not literally price control. Or maybe you could say it’s price control with the penalty for violating the control spelled out explicitly: “establish a penalty for any California-based refineries that exceed that margin.”
It reminds me of Nixon’s price controls in 1971. The setting was very different. Nixon imposed a 90-day price freeze on August 15, 1971 and then relaxed the freeze but kept controls into 1974. But of course OPEC got powerful and raised the world price of oil from about $3 a barrel to $11 a barrel in a few months in late 1973. Nixon’s price controls didn’t allow refiners to pass along much of this increase. Thus the huge shortages and line-ups.
With Newsom’s plan, it’s hard to know how things will play out. It will probably be substantially less bad than Nixon’s controls because it sets “a maximum gross gasoline refining margin,” which means that any increase in the underlying price of crude oil will be allowed to be passed on.
One thing to be aware of, though, as I pointed out in January, is that the large margins don’t seem to be at the refiner level but at the individual gas station level. So if California’s government squeezes refiner margins, refiners would almost certainly respond by reducing output. If gasoline stations are free to raise prices then, ironically, Newsom’s controls will make gasoline prices higher than otherwise.
READER COMMENTS
Mark Barbieri
Mar 28 2023 at 4:14pm
It is really impressive that the California legislature knows the appropriate gross margins for refiners. Personally, I would be scared that I would set them wrong and cause refiners to reduce output or even leave the state. I know so little about it that I’d be forced to rely on purchasers negotiating fair market prices with producers. But I’m clearly not as smart as they are.
I haven’t read the bill, but I assume that it has similar penalties on purchasers if they drive gross margins too low. I mean, fair is fair, right?
Jon Murphy
Mar 29 2023 at 8:34am
I wonder if this plan could result in gasoline prices being slow to fall in California.
Depending on the elasticity of demand and ones average cost curve, one can increase one’s profit margins by lowering the price of the good. Indeed, we saw that with oil this past year: many companies’ margins rose as prices fell in the second half of the year.
If California puts controls on profit margins, then companies may be hesitant to reduce prices if it increases their margins beyond what the state seems acceptable.
David Seltzer
Mar 29 2023 at 2:18pm
Per Thomas Sowell;
“Why the transfer of decisions from those with personal experience and a stake in the outcome to those with neither can be expected to lead to better decisions is a question seldom asked, much less answered.”
“The fundamental difference between decision makers in the market and decision makers in government is that the former are subject to continuous and consequential feedback which can force them to adjust to what others prefer and are willing to pay for, while those who make decisions in the political arena face no such inescapable feedback to force them to adjust to other people’s desires and preferences.”
Andrea Mays
Mar 31 2023 at 5:46pm
Exactly. The CA legislature substitutes its wisdom for the wisdom of the capitalists; the legislators will face no penalty if they get it wrong, while the capitalists face a big penalty if they get it wrong.
diz
Mar 29 2023 at 5:03pm
I assume this can only be legally applied to refineries in California. Years back I worked for a company that operated a refinery and retail network in the state and refining margins tend to be high there in part because the marginal barrel of refined product was imported and import options are expensive. Also environmental compliance costs had caused may refineries to close.
This continues. I believe a few refineries up in the bay area recently shuttered to reconfigure to produce bio fuels, which I think results in about a 90% drop in fuel production. Laws like this will likely cause refineries in California subject to the tax close or reduce output, and create more dependence on expensive imports from areas not subject to the tax.
Not sure how they will deal with the price mismatch between the price of gas produced in CA and the price of gas imported from elsewhere. Could bring back shades of the Marc Rich “new oil” vs. “old oil” trading scandal during the oil embargo. Or maybe they’ll just let the CA refineries sell their oil at market and confiscate the “excess profit”.
Pete Smoot
Mar 30 2023 at 10:29am
Oh fer cryin’ out loud. Gas is already expensive in California, we want to make it scarce too?
Oh, wait, that’s only what 200 years of economics tells us will happen. No reason to believe it’ll be the same this time.
Capt. J Parker
Mar 30 2023 at 10:45am
Thanks for this, Dr. Henderson. I remember so clearly sitting in gas lines in 1974. As a 17 year old with a newly issued drivers license, gas lines seemed a cruel speedbump on the highway to my vision of the American dream. The thing was, in 1974 I had absolutely no idea why there were gas lines. I knew about OPEC price hikes and thought they were reflected in the gas price hikes at the pump. I spent my time in the gas lines imagining gasoline distribution pipelines or super-capacity tank trucks or high flow rate gas pumps, thinking that the lines were some kind of distribution bottleneck that was mysteriously made more acute by higher prices. I vaguely remember news stories saying the lines were all our fault – we were hoarding – too many trips to the gas station to keep our tanks full, thwarting out valiant politicians work of keeping prices down.
In 1977, now a college junior, I took micro-economics for non economists 101. One of the early lectures was an analysis of Nixon’s price controls using supply and demand graphs. It was so logical and straightforward seeing how price controls create shortages but at the same time it was an electric shock for me to realize how wrong my earlier thinking about gas lines had been when I lacked a very basic tool to think about things like an economist.
Fast forward to 1979 – Gas lines returned that summer. This time I spent my time in line imagining ways to get the politicians to let the markets work and educate everyone on the real reason why they were waiting. I still though about technological means of increasing supply but understood that no matter supply curve there would still be lines if government set the price above market.
Nixon’s tinkering with the market in the early 70’s included a scheme where domestic oil production was taxed and the proceeds from the tax were used to subsidize the price of foreign oil. Would the late 70’s oil price shock have been less of a problem without this intervention? I’m sure the answer is yes.
If you look at the long run trend of per capita real GDP, the 70’s was a period of dramatic stagnation. Some of that stagnation is to be expected because the oil price increases were a supply shock to an energy intensive economy. But, you have to wonder how much worse it was made by political intervention in the market.
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