California gas price spike result of 'mystery' surcharge?

By U.S. EconomyFOXBusiness

California gas prices hit a five-year high

WSJ’s James Freeman, Vision 4 Funds Distributors VP Heather Zumarraga, Kadina Group President Gary B. Smith and Barron’s senior editor Jack Hough discuss why gas prices in California surged to a five-year high.

California Gov. Gavin Newsom does not appear to be convinced a recent surge in California’s gas prices is the product of market conditions.

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On Tuesday, Newsom asked the California Energy Commission to investigate why the state’s gasoline prices are so much higher than the rest of the country, citing independent analysis that suggests there could be an “unaccounted-for price differential” resulting from “inappropriate industry practices.”

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The committee confirmed to FOX Business it would begin the assessment immediately, and provide results by the May deadline.

As of Wednesday, the average gas price in the state was about $4.03 per gallon, while the national average was $2.86 per gallon, according to AAA. However prices in some cities, like San Francisco, were even higher – at $4.10. Those are the highest prices California has seen since 2014. Prices have risen around 68 cents per gallon over the course of a month.

Newsom's concerns appears to refer to analysis conducted by University of California Berkeley professor and former chair of the California Energy Commission’s Petroleum Market Advisory Committee, Severin Borenstein, who found there is a “mystery surcharge” for California drivers that cannot be explained by higher taxes – among the highest in the country – and producer costs.

“In the past few years, the price gap with other states has jumped much more than costs and taxes can explain,” Severin wrote in an October blog post.

Severin said, as of 2018, the mystery surcharge was about 22 cents per gallon. The apparent phenomenon largely occurred after a refinery explosion in 2015 which restricted supply and drove up prices, he said. However, prices never fully returned to normal. Severin called for a serious investigation by the state into the matter, which he said has cost California families $3 billion last year alone.

A report from California’s Petroleum Market Advisory Committee – of which Borenstein was the primary author – concluded in 2017 that since 2015, gas prices “exhibited a continuous and significant unexplained differential compared to the rest of the country.” The committee was unable, however, to “reach clear conclusions.”

On the other hand, some experts aren’t so quick to point to non-market forces influencing the California market.

As previously reported by FOX Business, a supply crunch from refinery upsets in Los Angeles and San Francisco was contributing to the price uptick – specifically because California has a unique gasoline standard, which means replacements for the production shortfall are harder to come by. Flooding in parts of the Midwest also compounded problems, since it affected ethanol blends and caused distribution disruptions.

Patrick DeHaan, a senior petroleum analyst at GasBuddy, told FOX Business that there are no mysterious factors at play – it is simple supply and demand economics.

“When a refinery in a tight market like the West Coast goes down, knowing few refineries produce California's one-off gasoline mix, is a recipe for a course in Econ 101: supply drops, and demand is inelastic, meaning motorists still need fuel, so prices can soar,” DeHaan explained. “I don't see much/if any manipulation here, this is how markets work.”

DeHaan noted that the effects of refinery, or other, issues will often take weeks to affect drivers.

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Fellow GasBuddy senior petroleum analyst Dan McTeague told FOX Business he expects prices to get worse for Golden State drivers before they get better. McTeague said they could rise by another 10 cents – assuming refineries are able to iron out their issues, which is far from certain.

Meanwhile, drivers across the country could see prices rise, too. A variety of seasonal factors – including refinery maintenance – could drive the national average near $3 per gallon within the coming weeks.