Newsom wins feud with oil industry – or did he?

This story appeared in Calmatters

Gov. Gavin Newsom signs a bill on his proposed oil profit penalty plan in Sacramento on March 28, 2023. Photo by Miguel Gutierrez Jr. , CalMatters

In summary

California Gov. Gavin Newsom claims victory in his crusade against the oil industry, but regulating the prices Californians pay for fuel will be a very tricky process.

So, the third time was the charm for Gov. Gavin Newsom’s crusade to punish oil companies for what he described as price-gouging – sort of.

Newsom spent six months vilifying the oil industry after retail gasoline prices surged last year to as much as $2.60 a gallon over the national average, and initially proposed a tax on windfall profits.

However, that didn’t wash with enough Democrats in the Legislature to pass, since new taxes require a two-thirds vote. Newsom then exchanged the tax for penalties, but while they would have required only a simple-majority vote, legislators were also cool to deciding what profit margins would be allowed.

Finally – and almost in desperation – Newsom cut a deal that would dump the whole issue onto the California Energy Commission to gather data about refinery operations, establish a reasonable profit allowance and assess penalties for exceeding it.

“Finally, we’re in a position to look our constituents in the eye and say we now have a better understanding of why you’re being taken advantage of,” Newsom said last week as he signed the bill. “There’s a new sheriff in town in California, where we brought Big Oil to their knees. And I’m proud of this state.”

It was a characteristic bit of hyperbole on Newsom’s part. It will take months, and perhaps years, before the energy commission takes any action to set profit margins, much less enforce them.

“Nothing is going to happen in the short term,” Newsom acknowledged. “Gas prices are not going to drop immediately.”

Industry officials indicated that they would sue if they consider some of the proposed regulations too onerous, which could tie things up indefinitely.

“We need to wait and see what becomes of this,” a spokeswoman for the Western States Petroleum Association said.

Another caveat: The legislation is aimed at regulating “gross gasoline refining margins.” However, the state’s foremost expert on the subject, Severin Borenstein of UC Berkeley’s Energy Institute, told legislators at a hearing for Newsom’s second version of the crackdown that most of the sharp hikes in retail prices occurred as gasoline was being moved from wholesalers to the retail level. Thus, limiting profits on refining might not have a major effect on retail prices.

Finally, the last few passages of the legislation, which got almost no media attention, indicate that the energy commission will not only regulate refinery profits but must strive to ensure the industry’s ability to supply enough fuel over the next few decades for a “reliable, safe, equitable, and affordable transition away from petroleum fuels” to battery-powered vehicles.

That could be the trickiest aspect of the whole issue, and one with the greatest potential impact on the motoring public.

The new law essentially transforms the refining industry into a public utility, much like the suppliers of electricity and natural gas. That means not only attempting to regulate prices but making sure the industry earns enough money to keep it in business for two or three decades, while some Californians continue to drive gasoline- and diesel-powered vehicles.

Newsom has banned the sale of such vehicles after 2035, but that doesn’t mean they will suddenly disappear. Moreover, the technology to replace diesel-fueled trucks that carry freight into and out of the state is still in its infancy, and residents of other states seeking to drive into California will expect that they can fuel their cars.

How will California regulate petroleum fuel prices while simultaneously trying to both eliminate refiners and make sure they continue to produce enough fuel to meet demand indefinitely?

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