HomePoliticsThe oil industry faces a growing threat: Newsom's California

The oil industry faces a growing threat: Newsom’s California

“It’s clearly redefining the industry and its role,” Jamie Court, president of Consumer Watchdog, said of the lawmakers’ efforts. “And it’s consistent with phasing out the fossil fuel industry.”

The industry does not give up without a fight. Oil companies and their lobbyists are working to prevent Newsom’s latest proposal, which would penalize companies if they raise prices back to the record levels of the fall, when California gasoline topped $6 a gallon.

State prices at the pump rose nearly $3 above the national average in October, to $6.42 a gallon, as oil companies nearly doubled their profits year-over-year.

If lawmakers pass any version of Newsom’s proposal, it will be the first move in the nation with big implications for other states and the potential to speed up or slow down clean energy transitions. California would also join what is effectively a massive experiment in energy price controls taking place in Europe.

“They are taking advantage of you because they can,” Newsom said of the oil companies at a news conference on December 5. “Because no one has faced them. Why? Because they have unlimited funds, unlimited ability to manipulate and deceive, lie to people, lie to people. And that’s what I hope they do once again, in this effort.”

His proposal, still lacking in details, would take a share of oil refinery profits above a threshold to be determined and distribute the money to consumers. The state legislature is expected to consider the plan in January.

But industry representatives and analysts say the problem is not as simple as Newsom, who ordered regulators to ban sales of new gasoline-powered vehicles by 2035, appears to be.

“He wants to regulate and tell us to keep our facilities, but he also says, ‘Look, we’re not going to sell gas-powered cars by 2035,’ and shortly thereafter he wants us out of business,” Western States said. Petroleum Association spokesman Kevin Slagle. “So at some point, refiners are going to have to look at California and decide whether or not it makes sense to be there. And that’s starting to become a real problem for consumers and others who need fuel.”

California is taking more aggressive steps than any other state to address climate change by reducing the use of fossil fuels. Its air quality regulatory agency on Thursday approved a plan to achieve carbon neutrality by 2045, in part by cutting demand for fossil fuels by 90 percent.

Whether the state can meet these goals is an open question. Gasoline use has declined in recent years as more people buy electric vehicles, work from home or travel less due to the pandemic. But prices at the pump are often the highest in the country, and politicians felt the sting of voter anger last summer and fall.

Trying to regulate fuel prices has proven ineffective in the past, especially under Richard Nixon and Jimmy Carter, when price caps led to supply shortages and long lines at stations.

“They will spend all their time trying to figure out how to manage the margin instead of wasting time and resources competing with each other,” said David Hackett, chairman of the board of directors of Irvine-based consultancy Stillwater Associates.

The conflict between Sacramento lawmakers and the oil and gas industry is not new.

State legislators have weighed oil against the environment since at least the 1920s, when they began taxing production to fund public parks and shorelines, appeasing beachgoers who opposed oil rigs littering shorelines. of southern California, said Paul Sabin, a professor and author at Yale University. from “Crude Politics, The California Oil Market, 1900-1940”.

Newsom’s proposal points to 11 oil refineries still operating in the state, the oldest dating back to 1896.

“People don’t necessarily think of California as a western state that’s a place of resource extraction, but Southern California was really an oil town in a lot of ways,” Sabin said.

Oil pumps still dot Los Angeles, but three days before Newsom announced his proposal on December 5, the Los Angeles City Council banned new oil wells and ordered an end to production in the city within 20 years. The council’s ban followed a statewide ban on new wells within 3,200 feet of schools, parks and homes.

“[Newsom is] very aggressive, but I don’t think too aggressive, because the situation demands action,” Court said.

As in previous issues, California is borrowing from Europe. The Council of the European Union opted in September to impose temporary windfall taxes on almost all of its member states to try to rein in excess profits amid price spikes linked to Russia’s invasion of Ukraine. The UK is also trying.

The details of the EU measures vary widely, but most are based on a tax on profits of more than 20 percent above the average profits of the previous four years. Reuters has reported.

The broader saga of fossil fuels versus renewables is also playing out on the world stage, with clean energy gaining, according to the Annual analysis of the International Energy Agency of renewables published this month. The world will increase its renewable energy capacity over the next five years by 30 percent more than the agency projected last year, according to the report.

China, the European Union, the United States and India are driving rapid growth, most of which is coming from wind and solar power. Renewables are expected to become the world’s largest source of electricity generation by 2025, and solar power is expected to overtake coal as the world’s largest power source by 2027, according to the report.

In California, the transition to renewable energy depends on budget surpluses, new technologies and other factors. But state lawmakers aren’t likely to escape the powerful political pressure of gasoline prices any time soon.

For Vince Fong, one of 18 Republicans in the 80-member California State Assembly, Newsom’s urgency and rhetoric suggest he is more interested in scoring political points than addressing the factors contributing to the prices at the pump.

“You’re not focusing on the fundamentals of supply and demand in the energy market and the volatility that still exists,” said Fong, whose Bakersfield district is a center of the oil industry. “He’s trying to make headlines and he’s demonizing the very people who give California power.”

Before the proposal was formally submitted to the Legislature as a sanction, Newsom called it a windfall tax.

Democratic leaders in the state Senate and Assembly said then that taking “excessive profits out of the hands of Wall Street” and passing them on to consumers deserved “strong consideration” by the Legislature.

Neither leadership office had refined their public positions this week.

“The speaker is still reviewing this proposal and looks forward to discussing the issue with his colleagues,” Katie Talbot, a spokeswoman for Assembly Speaker Anthony Rendon, said in an email Tuesday.

Record profits aside, the California gas market is unique in several ways.

There are no crude oil pipelines in California. Refineries in the state have to produce cleaner gasoline from crude oil than other states, which means gas from other states cannot be supplied directly to California stations.

High fuel standards cost more, and California imposes the second-highest excise tax, after Pennsylvania, on wholesale oil. The state also imposes higher taxes on the pump than other states.

For a long time, those factors explained the difference between California’s gasoline prices and the national average, Gordon Schremp, a senior fuel specialist at the California Energy Commission, said at a Nov. 29 hearing.

But in 2015, a processing unit exploded at ExxonMobil’s Torrance refinery, temporarily reducing supplies. Refineries raised prices in response, increasing profit margins and never returning them to pre-blowout levels, Schremp said.

California’s gasoline demand peaked in 2017 and has been declining ever since, due to the adoption of electric vehicles and the pandemic’s shift to remote work, Schremp said. Next year, demand is expected to fall 12 percent below 2019 levels, he said.

At the same time, California has lost almost 10% of its refining capacity since 2019, compared to a national loss of 4.3%.

Limited competition is a factor in California pricing. Just five companies — Chevron, Marathon, Valero, PBF Energy and Phillips 66 — produce the vast majority of gasoline sold in the state.

California has twice as many licensed drivers per gas station as the rest of the country, according to Hackett of Stillwater Associates. A disproportionate share of the stations are run by brand name retailers such as Shell and 76.

“We just don’t have the competence and discipline of those off-brand stations,” said Severin Borenstein, a UC Berkeley professor of economics and former chair of the Energy Commission’s now-dissolved oil market advisory committee.

Borenstein and Hackett believe that competition must be addressed as part of California’s solution to persistently high gas prices, spikes or not.

“There is a problem with insufficient competition so regulatory changes should at least be considered,” Borenstein said.

Consumer Watchdog’s Court said that if the profit margin threshold in Newom’s proposal is high enough, companies will still be able to make a lot of money in the huge California market. In his opinion, oil companies are not that different from other companies that must justify price increases to regulators.

“We’ve done this before with insurance, we’ve done this before with public services, we’ve even done this with cell phones,” he said.

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