A Major Step to Protect Californians from Gasoline Price Manipulation

Tim O'Connor, EDFYou can’t turn on a TV or radio in California these days without hearing the oil companies and their industry associations complaining that the state can’t afford to move to cleaner fuels and predicting that cutting pollution from the transportation sector will drive up gasoline prices.

What the oil industry’s $56 million political campaign, and even wider reaching ad campaign, doesn’t say is that if gas prices do go up this year, it is likely to be the oil industry—not clean energy—that’s to blame.

Since 2005, the price of gas in California has fluctuated by an average of $1.16 per gallon, while diesel has fluctuated by $1.01. Year after year, prices at the pump shoot up – yielding significant additional profits for fuel suppliers – then casually drift down back to a point higher than where they started. The phenomenon is so well known, industry insiders call it rockets and feathers.

The oil companies say they don’t cause these fluctuations, but the problem is so severe that Governor Jerry Brown and the state legislature just gave the California Energy Commission $342,000 to investigate and prevent gas price fixing and market manipulation by the industry.

Market domination can lead to price manipulation

Transportation fuel is a concentrated market where a handful of suppliers control a product everyone has to have. Small and large businesses, commuters, soccer moms, motorcycle clubs—pretty much everyone needs the gas and diesel supplied in California by just 22 companies, six of which (Chevron, Tesoro, BP, Phillips 66, Valero and Shell) control 90 percent of the total supply.

Since the early 2000’s, government officials have recognized that this concentrated, opaque market is a problem. As a 2004 report by then-Attorney General Bill Lockyer reported:

“Without changes in public policy that address market conditions, California will not rid itself of high gasoline prices. Policymakers must begin taking the steps necessary to increase competitiveness, supplies and fuel conservation…and to reduce California’s petroleum dependence through increased fuel economy and non-gasoline based technology.”

Eight years later, in 2012, U.S. senators from California, Washington and Oregon sent a letter to U.S. Attorney General Eric Holder requesting an investigation into oil company market manipulation and price fixing. Citing analysis produced by McCullough Research, the lawmakers observed that refinery shut down reports were inconsistent with production data. According to McCullough, price increases generated an estimated $25 million per day in windfall profits for the oil companies.

A promise made in 2013

In September 2013, the California state legislature took a stand against market manipulation by passing a landmark bill, SB 448. The bill provides resources and direction to the state’s Energy Commission to perform market analysis to identify the causes of gas and diesel price spikes and fluctuations.

By passing the bill, the legislature made California the first state to provide dedicated resources to look into gasoline price swings and protect California drivers. Governor Brown, recognizing that his state needed the capacity to deal with sudden price fluctuations, directed “the Commission to work with the Attorney General to evaluate market trends and ways to respond to price volatility.”

The answer: Fuel diversification and clean fuels policies

There are many reasons to support cleaner fuels. California still has the worst air quality in the nation, and spends over $30 billion per year on gas and diesel from imported oil. No wonder more than 70% of Californians support its clean fuel policies. Yet the oil companies, led by Chevron, Tesoro and Valero are doing everything they can to kill these measures – common sense solutions that clean up the air and accelerate home-grown alternative fuels that break our dependence on gasoline and diesel.

In early 2014, EDF teamed up with nation-leading economists who focus on fuel market dynamics to describe some of the benefits of California fuel policies, such as long term price reduction. In the analysis, we found that:

“By diversifying the state’s fuel mix with a portfolio of alternative and conventional fuels, California’s overall fuel price volatility and price levels (for all fuels in the portfolio) are likely to be reduced in the long run… By extension, policy changes that undermine or take away incentives to diversify the fuel mix are bad for California consumers, the economy, and the environment.”

As California implements its new state budget, hires new experts and uses its law enforcement tools to look into the true causes of market fluctuations, the benefits of California clean fuels policies will become even clearer. The recommendations made by Attorney General Lockyer ten years ago will finally be fulfilled and the oil industry’s blame game may even be shut down once and for all. Best of all, the popular new policies that will lead California to cleaner, cheaper fuel will be strengthened and preserved.

This entry was posted in General. Bookmark the permalink. Both comments and trackbacks are currently closed.