California Focus: Why gas is higher in California State fuel policy drives up the price at the pump, study says.

Wallace Walrod, Vice president of Economic Development and Research for the Orange County Business Council | Tuesday, September 1, 2009
The Orange County Register

When it comes to a gallon of gas, living in California comes at a premium, no matter what grade of fuel you pump. Fuel costs are higher here than the rest of the nation because of state government taxes, fees and regulations, putting consumers continually at risk of price spikes and supply interruptions.

A new study by UC Irvine, UCLA, Cal State Long Beach and Orange County Business Council economists shows that California gasoline prices, on average, are 30 cents higher per gallon than the national average – and this differential has been growing for nearly two decades. State gas taxes are 43 percent higher than the national average.

The study, sponsored by the nonprofit group Fueling California, shows that gas taxes are only part of the reasons California gas is so much costlier. The state’s tough environmental policies also continue to drive up fuel costs and create even more economic uncertainty.

Fueling California, a coalition of major industries doing business in the state, initiated the study to provide the governor’s office, legislators, decision-makers, regulators, the media and the public with more information and a greater understanding of the state’s volatile fuel costs and to outline policy changes that could help ease the financial burden in these tough times.

The study shows that California has among the most demanding set of fuel policies in the world, leading to a myriad of distinct fuel standards and blends.

Californians pay five to 15 cents extra per gallon solely due to the special blends required in the state. While these special blends help the environment, they also can cause price spikes when supplies run low.

As our fuel standards grow increasingly differentiated from the rest of the country, it also is harder to find supplies that comply with state regulations. This effectively renders California a "fuel island" since we also have no pipelines linking us to petroleum or crude oil supplies, and our storage capacity is limited.

The state must import an increasing share of fuel from shrinking domestic and distant international sources.

Our study found that this already tenuous situation is complicated further by the fact that California’s own refining capacity has stagnated for decades despite a rapidly growing demand for gasoline. Recent court action shutting down a refinery enhancement project in Richmond casts yet another shadow on California’s ability to fend for ourselves in the event the supply of our specially blended fuel runs short.

All of this suggests that our elected leaders and regulators need to consider carefully the ripple effect of the state’s fuel policies.

Policies can change when the true impact on consumers and the economy are clearly understood. Among other things, the state could:

  • Alleviate future fuel price spikes by reconsidering the economic impact or timing of otherwise worthwhile environmental policy goals during a time of severe recession, like right now with unemployment at 12 percent and millions of families struggling to pay their mortgages.
  • Temporarily reduce gas taxes during periods of supply disruption.
  • Allow special fuel blend requirements to be eased temporarily if prices rise above a certain pre-determined point.
  • Ease the regulatory difficulty to build and expand storage and refining capacity

There is no inevitable reason why California fuels need to be more expensive in the future than in other regions.

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