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?
