As Calif. considers refinery profit caps, Ariz., Nev. fear rising gas prices

California passed SB-2 in 2023 to have the CEC explore setting a maximum refinery profit margin to “reduce price spikes and stabilize the gasoline fuel supply market."

Published: May 8, 2024 5:58pm

(The Center Square) -

(The Center Square) - As the California Energy Commission considers adopting a rule to put profit caps on the state’s remaining 9 refineries — the only ones producing the state’s special gas formulation — Arizona and Nevada, which use California gas, could face higher gas prices.

“A potential maximum refinery margin and penalty … may actually increase retail prices for California, Nevada, and Arizona consumers alike. It may also cause California refineries to close prematurely,” said Arizona State Representative Justin Wilmeth, R-Phoenix, to the California Senate committee hearing overseeing the CEC’s adoption of a refinery profit cap. “These decisions will harm Arizona and they will harm Nevada.”

California passed SB-2 in 2023 to have the CEC explore setting a maximum refinery profit margin to “reduce price spikes and stabilize the gasoline fuel supply market. California’s gas prices are $1.73 above the national average, in part due to having the highest gas taxes and fees in the nation at $1.62 per gallon, and use of California-specific gasoline that cannot be imported from refineries that do not produce its formulation. California currently has 14 operating oil refineries, only 10 of which produce gasoline.

With so few refineries, California’s remaining refineries operate at 99.7% of capacity, which means that any reduction in output from maintenance creates major supply shocks — and price spikes. In the case of severe gasoline shortages, California has imported gasoline from Asia, Europe, and Mexico. Because the state is phasing out fossil fuels, including fossil fuel production, refiners have little incentive to invest in expanding or updating California refinery operations.

According to Consumer Watchdog, this leaves California’s poorest workers the worst off, which they say justifies having profit caps.

“At $4 per gallon, 9% of an annual minimum wage salary is spent on gas, at $5 per gallon 11% of an annual minimum wage salary is spent on gas, and at $6 per gallon 13% of an annual minimum wage salary is spent on gas,” said Kim Stone on behalf of Consumer Watchdog at the hearing. “Low income individuals and families are the principal beneficiaries of a maximum margin because of its potential to reduce price spikes.”

Manufacturers agree that the state’s high prices for refined fossil fuel products are a problem, but emphasized expanding refinery capacity and fossil fuel supply would better help businesses and consumers than adopting a refinery profit cap they say would increase energy prices and threaten energy supplies.

“Such measures … would likely penalize California consumers by exacerbating the already limited supply of in-state gasoline. Implementing such a system could lead to fuel shortages that might trigger severe consequences across various industries,” said Dean Teller on behalf of the California Manufacturers and Technology Association. “It is crucial for the state to tackle the existing challenges related to gasoline supply, which would include permitting hurdles, physical limitations on production, marine imports, regulatory uncertainties that deter investment, and geographical restraints. We are concerned that such measures may deter investment in California's refining capabilities and the shutdown of active refineries.”

The CEC is set to make a decision on whether or not to adopt a profit cap by the end of 2024.

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