California Energy Commission Proposes State Takeover Of Oil Refineries

Just as Chevron Oil company announced that it is moving its headquarters to Houston Texas from San Ramon California, California Energy Commission regulators announced proposed government controls of the petroleum industry, ostensibly in order to combat future energy price surges, according to a report released August 1, 2024 by the CEC.

Despite California’s radical and very accelerated green agenda which does not include oil and gas as fuels, the CEC fully expects some of California’s nine oil refineries to be shuttered due to falling demand, which would give the remaining refineries increased pricing power and raise the possibility of a surge in gas prices, the study said.

But the study had other interesting conclusions:

Like most product prices, gasoline prices should ideally obey the laws of supply and demand.

However, supply dynamics in California’s transportation fuels market differ from many other markets in the United States. Despite being directly geographically connected to other states, California’s relatively isolated transportation fuels market makes it essentially a fuel island. In addition, the critical need to address the state’s unique air quality challenges means that the state must require a unique fuel specification that differs from the rest of the nation. Related to the isolated market, the state’s opaque spot market appears to have an outsized influence on prices in a way that does not align with supply or demand fundamentals.

These factors have led to several challenges for the stability of transportation fuel prices. For example, in the last two years (2022 and 2023), California had two gasoline price spikes in September and October.

“Spikes were not seen in regions outside of the western part of the United States.”

Do my eyes deceive me?

As Ed Ring reported in the Globe in January, “Despite being a sunny, solar friendly state, with ample areas blessed with high wind, California still derives 50 percent of its total energy from crude oil. Another 34 percent comes from natural gas. This fossil fuel total for California energy, 84 percent, actually exceeds the world average for 2022, which – including coal – came in at 82 percent.”

Gov. Newsom claims that the state’s highest-in-the-nation gas taxes and prices are not what led to dramatically spiking gas/oil prices but because of price gouging by the oil industry. In May, Newsom even signed a gas price gouging law into place.

The California Energy Commission disagrees with the governor, showing that gas price spikes occurred in the last few years because of refineries temporally going out of commission because not enough oil was getting to them. The CEC also said that lower prices this year were caused by many factors, including a cut in industry costs and profits, lower crude oil costs, and in how much environmental programs are getting from the industry, the Globe reported. Prices could even be lower, but as the CEC noted, the only thing that went up was the gas tax itself.

The newest CEC study reports “gasoline remains California’s dominant transportation fuel, and demand is not especially responsive to short-term price spikes.”

They further explain:

Gasoline demand is expected to continue a downward trend as demand for ZEVs increases and other climate-friendly strategies unfold. However, the CEC projects that gasoline demand will remain above two hundred thousand barrels per day (TBD) at least through 2035 if not longer. Even under the most aggressive scenario transition to ZEVs, millions of petroleum-fueled vehicles are anticipated to remain on California’s roads and highways beyond 2035.

These vehicles will need fuel to operate, and many of the vehicles may be owned by lower income individuals and families, making it even more compelling to identify ways to ensure an affordable, reliable, equitable, and safe supply.

California accounts for most of the U.S. zero-emission vehicle sales – over 40% in 2022. I”m still looking for 2023 records. But this switch to electric vehicles did not originate because of supply and demand – the California Air Resources Board has been driving the push to electric with regulations.

Ed Ring reported at the Globe:

According to the Department of Motor Vehicles, there are 30.8 million cars and light trucks currently registered in California. According to the U.S. Department of Energy, of these, 1.2 million are “BEVs,” that is, pure battery-electric vehicles and not including hybrids that combine gasoline and electric propulsion. Almost all of these BEVs were sold in the past five years, with 374,000 sold in 2023. An overwhelming 60 percent of BEVs sold were Teslas; 226,000 in 2023. The closest rival to Tesla was Chevrolet, selling 19,000 BEVs in the state, followed by Ford, Mercedes, and Hyundai, each of these three companies selling 16,000 BEVs.

And then the CEC pivots to how to manage the evil, rotten and bad oil and gas industry because “Californians Deserve a Strategic Transition Away from Petroleum Transportation Fuels:”

…in workshops and hearings held by the CEC and in stakeholder comments, there is concern about market power abuse in the petroleum sector, and the state appears to be increasingly susceptible to price spikes as seen over the last decade. Stakeholders at CEC workshops and hearings have expressed concern about unfair market dynamics resulting from increased market power in California’s petroleum industry and potential market gaming by industry participants. Moreover, stakeholders have expressed concern that harmful industry conduct will be amplified by bad actors acting anticompetitively. During this critical transition period, additional oversight is necessary to protect Californians from further market dysfunction and potential market manipulation.

The CEC proposes:

“The State of California would purchase and own refineries in the State to manage the supply and price of gasoline,” wrote the study’s authors, with the scope of the initiative ranging from “one refinery to all refineries in the state.”

The CEC considers closing refineries:

The specific refineries that would shut down under this pathway are uncertain, but the in-state capacity for refining would not be a smooth decline like the demand scenarios. Rather, the supply response will be “lumpy” in the sense that a typical refinery is capable of supplying about 10 to 20 percent of overall state demand. Should one refinery close or convert (to renewable diesel), a large portion of in-state CARBOB supply essentially vanishes. The position of other refineries will be temporarily bolstered, resulting in an increase in market concentration. However, suppliers could choose to secure additional CARBOB supply from other domestic or foreign refiners if it is economically viable.

And they discuss Impacts of Continued Refinery Operations:

Refineries are often near marginalized and disadvantaged communities, leading to disproportionate impacts on air quality and, consequently, the health of these populations.

Other proposals:

• During times of lower gas prices, fees would be levied in a variable manner to then allow for stabilization initiatives during California-specific price spikes.
• California would actively regulate the operating rules, prices, and rate of return of petroleum fuel market operators similar to the current structure used to manage private electric and fossil natural gas utilities as natural monopolies where California sellers would be required to have prices approved by the designated State authority and spending would have to be approved for cost recovery in prices.
• The State of California would purchase and own refineries in the State to manage the supply and price of gasoline.
• Measure, publicize, and potentially manage retail margins. Assure that all gasoline that is sold at retail stations in California is not sold at excessive retail margins.

From the horse’s mouth – the California Energy Commission said the quiet part out loud: Government control of the petroleum industry… and they did it in the last three pages of the 76-page study.

But the CEC did sort of question the whole state-owned refineries move and asked, “as demand for fossil fuel declines, will the presence of State-owned refineries inhibit an orderly phase out of refinery capacity?”

The state obviously does not understand that if you can’t make any money  you’ll have to curtail production, and you won’t be able to produce a product – or you’ll have to sell the product elsewhere. You can’t make this stuff up.