Cutting 50 Percent from California’s Petroleum Consumption can Lower Fuel Prices and Price Volatility While Keeping the Economy Strong

Keep reading for an overview or dig right into a new Environmental Defense Fund (EDF) policy brief on transportation fuel prices and the proposed 50 percent fossil fuel reduction for more details.

rp_Tim-OConnor-Nov-2014-214x300-214x300-214x300.jpgIf you are a movie buff, you might remember Groundhog Day in which Bill Murray’s character had to relive the same day over and over again. Well, if you live in California, you probably feel like the existing gasoline and diesel system is on the same style of hamster wheel (i.e. roller coaster prices, Californians paying more than the rest of the country, and the petroleum industry spending the money you pay at the pump to lobby against any change).

As the 2015 legislative season comes to a close, a new script can be written for the state’s transportation fuel system in the form of SB 350 (De León). This effort would reduce petroleum use by 50 percent and in the process could reduce overall gas prices in California, reduce seasonal and annual volatility, and inject healthy competition into fuel markets that retain and create jobs across the state.

Understanding how SB 350 can help fuel consumers across California is actually pretty simple. Since the vast amount of California’s fuel is sold by a limited number of providers and drivers primarily rely on a single type of specialized fuel (CARB reformulated gasoline) – there is basically no competition in the market or choices available to consumers. Therefore, decisions by fuel providers to fix refineries or upgrade pipelines have impacts that directly affect the price Californians see at the pump, as well as how much profit or loss those same fuel providers experience. With significant profit margins and a massive fuel consumption rate, it’s no wonder the petroleum industry is trying to retain the status quo where they can single handedly inflate gas prices and profits.

A 50 percent petroleum use reduction combined with an increase in alternative fuel consumption will change the California fuel market for the better. Basic economics (backed by empirical evidence) shows that these changes will decrease overall prices and price volatility experienced by consumers. With a more diverse supply of fuels to meet changing demand, petroleum fuel providers will have less overall control of the market – unlike the current structure in which they can artificially establish prices above their true cost of providing fuel.

Although California gas prices aren’t going to be cheaper than the cost to make the fuel, the overall cost of fuels is likely to decrease. Furthermore, as a result of increased reliance on a portfolio of various fuels across California (as opposed to a single fuel system), fluctuations in any one fuel price will have fewer overall economic consequences for the state.

In 2004, the market conditions in California looked essentially the same as they do today (though we now blend more ethanol into fuel as an oxygenate). At that time, a major investigation by then-Attorney General Bill Lockyer found that for fuel prices and price volatility to come down, “policymakers must begin taking the steps necessary to increase competitiveness, supplies and fuel conservation … [and] reduce California’s petroleum dependence through increased fuel economy and non-gasoline based technology.”

SB 350 is expected to provide an array of job and economic benefits as well. Under SB 350, the conventional petroleum industry in California would, with nine billion gallons of retained market share, still be the second largest fuel market in the nation. This means the existing infrastructure will continue to be used to meet ongoing fuel demands. Similarly, with the use of new fuels, additional businesses and jobs will be created – with evidence of significant growth already present. Finally, with the reinvestment of money retained in the California economy through avoided petroleum purchases, hundreds of billions of induced economic growth is also expected.

If the script for California’s future is written without any change in the fuel system, consumers will see the same as in years past. However, with the type of fundamental change envisioned by SB 350, Californians should expect a healthier economy, more fuel choices, and less overall volatility. This can only be a positive direction for the state with the largest fuel bill, and some of the worst air quality in the nation.

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