Oil companies joke about government consultation on unexpected profit tax

Are oil companies exploiting Californians to rake in record profits? How can government regulators stop refineries from shutting down for maintenance at the same time? What are the best approaches to prevent future gas price spikes in the Golden State?

As state regulators and lawmakers try to better understand what’s driving California’s high gas prices and assess whether Gov. Gavin Newsom’s proposal to tax oil company profits could be the answer, one thing is clear: They need more information and data from the companies that produce and distribute the gasoline.

The California Energy Commission followed those questions at a Tuesday meeting where they heard from industry analysts. However, commissioners did not get help from the companies that produce more than 90% of the state’s gasoline.

Chevron, Marathon, PBF Energy, Phillips 66 and Valero – all declined to participate in the hearing. In letters to the commission, most said that speaking publicly about their operations, maintenance and inventory levels would force them to reveal trade secrets. However, PBF Energy added that “the politicization of this matter by Governor Newsom, compounded by the misleading information he released and commented related to our earnings (Q3 2022), precludes us from participating in this hearing.”

According to PBF Energy’s third-quarter financial report, the company’s profits jumped from $59.1 million last year to $1.06 billion this year — an increase of nearly 1,700%.

Newsom called the reasoning of the oil companies “pathetic” and vowed to “hold these companies accountable.”

“All Californians deserve to know why we were ripped off at the pump even as gas prices fell across the country and crude oil prices plummeted,” Newsom said in a statement. “The oil industry had their chance today to explain why they made record profits at our expense, but they chose to shut us down.”

At Tuesday’s meeting, commissioners echoed the governor’s stance and criticized the absence of the oil companies.

“To say I’m disappointed that some of our largest oil producers in the state aren’t here is probably an understatement,” said Sen. Monique Limón (D-Santa Barbara). “Having people at the table who care about this problem and who want to be part of the solution is critical to how we move forward.”

The commission made no formal policy recommendations. But the issues discussed during the daylong hearing are expected to help inform decisions by lawmakers who will consider Newsom’s October proposal to tax oil companies when they reap excessive profits and to fund rebates to taxpayers.

A special session to discuss the merits of a windfall tax, which Newsom called for this fall, begins Monday.

Questions about the state’s high gas prices go back decades, but an unprecedented gap between the average price of gasoline in the Golden State and the rest of the country earlier this year renewed calls for answers. At the peak of this year’s gas price hikes, Californians paid $2.60 per gallon more than the national average — a margin never seen before.

Since then, California’s average gasoline price has fallen steadily, with prices on Tuesday dipping below $5 a gallon for the first time since the spring.

Despite the latest drop in prices, Newsom and proponents of a windfall tax argue it will help discourage oil companies from pursuing unwarranted price increases for years to come. Windfall taxes are intended to prevent exploitation by imposing a surcharge on companies when profits exceed a statutory limit.

The oil industry certainly disagrees.

Catherine Reheis-Boyd, executive director of the Western States Petroleum Association, said a new tax will only lead to higher gas prices in California.

“The only result of a windfall tax will make the problems worse,” she said. “You send the absolute opposite investment indication to anyone who wants to do business here.”

A half-dozen economists who previously spoke to this news organization said a windfall tax would do little to reduce gasoline prices in California but could succeed in bringing back profits.

A long history of high gas prices in California

Drivers in California have long paid more for gas than those in other states.

Much of that is due to California’s high excise taxes, strict environmental regulations that require special fuel blends aimed at limiting pollution and the state’s isolated fuel market. No pipelines carry gasoline to California, so the state is almost entirely dependent on in-state refineries to meet its gasoline needs.

However, Newsom and tax supporters argue that these factors do not justify the recent extreme price increases, especially because the companies made historic profits even as the price of crude oil fell.

Most of the state’s five main oil refineries saw earnings more than double in the past year.

“The fact that (Californians) are paying record prices, and especially low-income families are paying record prices, is unconscionable,” Commissioner Patty Monahan said.

State legislators to weigh new unexpected tax on oil companies

The special legislative session begins in less than a week, but Newsom and his administration have provided few details about the plan. Many questions remain unanswered, including how the tax will affect gas prices, how much profit constitutes a windfall and who will be eligible for the rebates.

Legislators typically gather in early December to swear in new members and then break for the holidays before really diving into the new legislative session in January. Thus, lawmakers do not expect to take serious action on windfall tax before the start of 2023.

It is unclear how much support Newsom’s proposal currently has among lawmakers. State Democratic leaders have said only that they looked forward to seeing the governor’s detailed plan.

The legislators in California last year took a first step towards more transparency in the finances of the big oil companies. A new law requires crude refineries to disclose monthly the cost of the crude they buy, how much they pay to convert it into gasoline and what they sell it for.

But Drew Bohan, executive director of the state Energy Commission, said more insight is needed.

Bohan did not comment on the governor’s proposed windfall tax on Tuesday, instead advocating for a new state regulation that would force oil companies to provide information about scheduled and unscheduled maintenance — a factor believed to have contributed to the gas prices seen in the past this year.

“Getting that information early will really help inform the decisions we have to make,” Bohan said.

Meanwhile, Severin Borenstein, an energy economist at UC Berkeley, urged state officials to investigate the contracts between California oil refiners and gas traders.

Borenstein, who has spent years studying gas prices in California, said a windfall tax would not solve a larger problem in the state’s gas market, which he calls the “mysterious gas surcharge.”

According to Borenstein, Californians currently pay 80 cents per gallon more than the rest of the county even after factoring in the state’s high taxes and environmental fees — a price premium that has been unaccounted for by the oil and gas industry.

“Just figuring out how refineries work doesn’t solve most of the problem,” he said. “There are complex contracts between refiners and outlets that we know almost nothing about that can easily be used by refiners to keep prices up.”

This story was originally published November 29, 2022 1:58 p.m.