Gasoline Price FAQs

Q. Why have California gas prices been going up so dramatically in recent months?
A: The recent market volatility is not limited to California, or even to the United States. Experts such as the U.S. Energy Information Administration (EIA) report that the high cost of crude is a primary factor, as is strong and growing global demand.

Q. But why does it always seem that California is hit the hardest?
A. Even under the best of conditions consumers in California and the other Western states tend to pay more for gasoline than those in states east of the Rockies. There are some specific market conditions on the West Coast that contribute to this:

First, according to the Energy Commission, California and the adjacent states which it supplies, are a “fuel island” that is geographically isolated from the rest of the country, and California law requires that we use a different blend of gasoline here. It’s the cleanest in the entire world, but it costs more to make. Second, Californians pay the 4th highest taxes on gasoline in the country – about 51 cents per gallon. Finally, the EIA has reported that demand for gasoline in California has grown at two to four times the rate of the increase in our capacity to produce it.

Q. Have the oil companies been closing down refineries on purpose to keep supplies low and prices high?
A. Absolutely not. It’s true that there are fewer refineries in California than there were ten years ago. However, according to a report from the Attorney General, that’s because, when the state mandated the new cleaner-burning gasoline formula in the mid 1990s, some of the smaller refiners couldn’t afford to modify their facilities to produce the new gasoline, and they couldn’t continue to produce the old formula because the state had made it illegal. They were effectively forced out of business by changes in the law.

Q. If the problem is lack of refining capacity, why don’t the big oil companies just build more refineries and make more gas?
A. The state attorney general has concluded that a combination of regulatory barriers and neighborhood opposition has prevented new refineries from being built over the last 35 years. The Energy Commission and other governmental entities have recognized this problem and are currently developing policies to help streamline the process while maintaining environmental quality.

Q. If that’s the case, why is Shell planning on closing its Bakersfield refinery, further reducing overall capacity in the state?
A. Shell’s published statements indicate that the refinery is not economically viable, and that is why it’s closing. Shell has also said it would be willing to consider selling the refinery to a qualified buyer but, to date, no such buyer has come forward.

Q. What about claims that because a few major oil companies control almost the entire supply in California, they can exercise market power to keep inventories low and prices high?
A. Numerous investigations, including one last year by the California Energy Commission, reported there was no evidence of such manipulation on the part of the oil companies, and the Federal Trade Commission has recently stated that there is no evidence that any refiner has the ability profitably to raise prices market-wide or reduce output at the wholesale level.

Q. Is there any merit to comparisons to the investigations of the electricity industry a few years ago, where a small number of players controlled the market and were in a powerful position to dictate prices without any competitive consequences?
A. That’s like comparing apples and oranges. The fact is, the gasoline market in CA is highly competitive. While electricity was sold directly to consumers by a handful of major corporations, gasoline is sold to consumers by a network of over 9,000 retail dealers throughout the state, over 90% of whom are independent small businesses, according to the Lundberg Survey. Consumers have a wide variety of choices when it comes to where to buy their gas, and experts like the AAA report that consumers have the ability to shop around for the best price. And, those prices are posted prominently outside every single station so motorists can choose whether to shop there or not.

Q. But haven’t all the recent oil company mergers created an anti-competitive situation here that hurts consumers?
A. On the contrary, the Federal Trade Commission examines the potential competitive impacts and takes steps to mitigate those potential impacts before granting permission for mergers to occur. That has happened in the case of every oil company merger that impacts California, and the state Attorney General has been involved in those evaluations and decisions as well.

Q. What about those record oil company profits?
A. Actually, oil and gas profit margins have been very much in line with those of other U.S. industries. During the first quarter of 2004, the profit margins of the oil industry averaged 6.9 percent, compared to an average of 7.5 percent for all U.S. industry (source: American Petroleum Institute, based on company financial statements and Business Week magazine).

Q. But consumers still suspect they are being gouged at the pump. Is there any truth to that suspicion?
A. WSPA and its member companies are keenly aware of, and sensitive to, consumers’ frustrations and questions. But, as numerous government investigations have found, it is market conditions (too little supply and too much demand) and market conditions alone that have caused prices to behave the way they have. The EIA investigated the allegations of gouging last year, and reported: “Are consumers being gouged…particularly at the pump? In EIA’s estimation, the answer is ‘no.’”

Q. What about the latest investigation, to be undertaken by the new Senate Select Committee?
A. There have been some 30 investigations over the last several decades, and all have reached the same conclusion: no evidence of wrongdoing or illegal activity has been found. That being said, the oil companies have always cooperated in these investigations, and we believe will continue to do so. We are confident the results will once again show that it is market conditions, not oil company business practices that are the cause of gasoline price behavior in California.

Q. If investigations and legislation aren’t the answer, what can be done to help bring prices down at the pump?
A. California’s tight gasoline supply situation has been evolving for the past 35 years – it took a long time to get us to where we are today, and any approach to improving market conditions will also take some time. Unfortunately, there’s no quick fix here. But, we need to address the core issue, which is the growing imbalance between supply and demand, in order to bring more product into the marketplace.

Q. What specifically do you have in mind?
A. We have been working with the Energy Commission and other stakeholders to identify policies that can help improve the supply side of the equation, such as: avoiding counterproductive state regulations; streamlining permit reviews; creating consolidated permitting for major energy projects; eliminating duplicative, overlapping and conflicting regulations; and eliminating the federal minimum oxygenate mandate for California gasoline. Furthermore, there are opportunities on the demand side as well, such as expanding fuel conservation efforts, continuing research into alternative fuels which give consumers more choices and further improving vehicle mileage efficiencies.

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