Gov. Newsom’s Latest Scheme Will Not Lower Energy Prices for Californians

After several failed attempts by Washington, DC, Democrats to bring the cost of energy down, gas prices are predictably rising once again. Democrats are now looking for a new scapegoat to blame on their failed policies, and it appears that at least in California they have found one.

Before President Biden threatened to levy a windfall profits tax, Governor Gavin Newsom was the first to target oil and gas companies with such a measure. Pointing to a discrepancy between crude oil and gasoline prices as evidence that energy companies are fleecing Americans, the Governor in early October called for a special session of the state legislature to enact his own “windfall profits tax” on energy companies that are allegedly “price-gouging” Californians.

But the truth is, there is no evidence of the illegal price-setting Newsom alleges. Days before the Governor made his announcement, a federal judge in San Diego dismissed a class-action lawsuit that spanned years of litigation and alleged traders at oil companies had colluded to keep prices high. In issuing the ruling, the judge found no evidence that oil refiners intentionally created shortages to increase prices – dealing a significant blow to Mr. Newsom’s argument.

While it is true that California has the most expensive gas prices in the country, sitting at over $5.45 per gallon on average, these prices have nothing to do with any falsely claimed sinister activity by energy companies. A new tax on oil companies would also not do anything to lower these prices. In fact, Stanford University engineering professor James Sweeney argued that a windfall profits tax could drive up the cost of gasoline in California, only adding to the pain at the pump Californians are experiencing.

The main cause of high prices is aggressive efforts by leaders in Sacramento to phase out the oil and gas industry in the Golden State. Since taking office, Governor Newsom has enacted new regulations to end fracking in 2024 and restrict oil drilling. He has also systematically been working to phase out internal combustion engines and recently decreed that all new personal vehicles sold in California after 2030 must be electric. This has discouraged investment in new oil and gas infrastructure in the state, exacerbating already significant supply issues.

For the better part of twenty years, industry experts have been warning California policymakers that the state lacks refinery capacity. Instead of working to address this circumstance, elected officials in Sacramento have instead “knowingly adopted policies with the expressed intent of eliminating the refinery sector” according to leading energy refiner, Valero. Complicating things even further is the fact that California requires its own “unique clean-burning gasoline.” This additional government mandate in tandem with the lack of adequate refining capacity has created a tight market, where taking even one refinery offline can cause prices to jump.

However, the issue runs deeper than just the misguided energy policies of the Golden State. On October 31, President Biden renewed his calls for a windfall profits tax on energy companies, saying, “Record profits today are not because they’re doing something new or innovative. The profits are a windfall of war.” Despite the fact that the President and many of his cabinet officials are now trying to tout record fuel production, these same individuals have a history of calling for an end to fossil fuels.

The reality is that the policies of this White House have created scarcity and are driving up prices. Limits placed on energy exploration on federal lands – this Administration has leased less federal land and offshore areas than any prior administration since World War II – have reversed many of the gains that were made over the last decade towards achieving American energy security. Cancelling pipeline projects such as Keystone XL, meanwhile, has made it more difficult to move product in and out of refineries and to market, further snarling supply chains and increasing costs.

In the early 2000s, the nonpartisan Congressional Research Service (CRS) studied the up to 70% in windfall profit taxes previously enacted by President Jimmy Carter to see what lessons could be learned. The tax did not exactly live up to expectations, falling 80% short of the projected $393 billion in estimated revenue, and the CRS found that windfall profits taxes ultimately have “adverse economic effects” including higher prices, lower domestic production, and increased foreign imports – all consequences that would be preferable for America to avoid.

If President Biden, Governor Newsom, and other Democratic politicians really wanted to lower gasoline prices, they should instead encourage domestic oil and gas exploration, expand refinery capacity, and prevent punitive taxes. A better solution clearly exists, and policymakers in Sacramento and in Washington should take heed.