Oil industry confronts a growing threat: Newsom’s California

SACRAMENTO, Calif. – Oil companies in California are planning an all-out fight against Gov. Gavin Newsom over his proposal to punish them for what he calls “unconscionable” profits. But that may be the least of the industry’s worries.

California’s state is moving to a carbon-neutral future, and fossil fuel companies are under threat. Lawmakers have established a deadline for banning the sale of gasoline-powered vehicles. Local and state officials have banned or restricted the use of new oil wells. Some cities have even banned gas stations and nonelectric lawnmowers.

These and other measures suggest a grim outlook in the country’s largest car market for an industry more closely tied to the state’s development than the Gold Rush.

“It’s clearly redefining the industry and its role,” Jamie Court, president of Consumer Watchdog, said of efforts by lawmakers. “And it’s consistent with phasing out the fossil fuel industry.”

The industry isn’t giving up without a fight. Oil companies and their lobbyists are working to head off Newsom’s latest proposal, which would penalize companies if they again raise prices to the record-high levels of the fall, when California gas cleared $6 per gallon.

The state’s prices at the pump climbed to nearly $3 above the national average in October, at $6.42 per gallon, while oil companies nearly doubled their year-over-year profits.

If lawmakers pass some version of Newsom’s proposal, it will be a first-in-the-nation move with big implications for other states and the potential to accelerate or slow clean-energy transitions. California would join the European-wide experiment in energy price controls.

“They’re taking advantage of you because they can,” Newsom said of the oil companies at a Dec. 5 news conference. “Because no one has stood up to them. Why? Because they have unlimited money, unlimited power to manipulate and mislead, lie about people, lie about people. And that’s what I expect they’ll do once again, in this effort.”

His proposal, still lacking in detail, would take a portion of oil refiners’ profits above a to-be-determined threshold and distribute the money to consumers. In January, the state legislature will likely consider his plan.

Analysts and industry representatives say that the issue is more complicated than Newsom made it seem. He directed regulators not to allow new gas-powered cars to be sold by 2035.

“He wants to regulate and tell us to maintain our facilities, but he’s also saying: ‘Look, we’re not going to sell gasoline-powered cars by 2035,’ and shortly thereafter he wants us out of business,” said Western States Petroleum Association spokesperson Kevin Slagle. “So, at some point, refiners will have to look at California and decide whether it makes sense to be there or not. And that starts to become a real problem for consumers and others who need fuels.”

California is taking greater steps than any other state in order to reduce the use fossil fuels and address climate change. The agency responsible for air quality regulations in California approved Thursday a plan to reach carbon neutrality by 2045. This includes reducing fossil fuel consumption by around 90 percent.

These goals are not achievable by the state. It remains to be seen if they can be met. In recent years, gas consumption has declined as more people purchase electric cars and work remotely. But prices at the pump are often the highest in the nation — and politicians felt the sting of voter anger this past summer and fall.

In the past, attempts to regulate fuel prices were ineffective, especially under Richard Nixon and Jimmy Carter when price caps led supply shortages and long lines at stations.

“They’re going to spend all their time trying to figure out how to manage the margin instead of spending the time and resources competing with one another,” said David Hackett, chairman of the board for Irvine-based consulting firm Stillwater Associates.

Conflict between Sacramento lawmakers and the oil and gas industry isn’t new.

State lawmakers have weighed oil against the environment since at least the 1920s, when they started taxing production to fund public parks and shorelines, mollifying beachgoers who objected to the oil derricks that crowded Southern California’s shores, said Paul Sabin, a Yale University professor and author of “Crude Politics, The California Oil Market, 1900-1940.”

Newsom’s proposal targets 11 oil refineries that still operate in the state, the oldest of which dates to 1896.

“People don’t necessarily think about California as a Western state that is a place of resource extraction, but Southern California was really an oil town in a lot of ways,” Sabin said.

Los Angeles is still home to oil pumps. However, three days prior to Newsom’s Dec. 5 announcement, the Los Angeles City Council had banned new oil wells. It also ordered that the city cease production within the next 20 years. The council’s ban followed a state prohibition on new wells within 3,200 feet of schools, parks and homes.

“[Newsom is] really aggressive, but I don’t think too aggressive, because the situation demands action,” Court said.

California borrows from Europe, as it has done on other issues. The Council of the European Union opted in September to impose temporary windfall taxes on nearly all its member states to try to rein in excess profits amid price spikes tied to Russia’s invasion of Ukraine. It is also being tried by the United Kingdom.

Details of the EU measures vary greatly, but most are based on a tax on profits of more than 20 percent above the previous four years’ average earnings, Reuters has reported.

According to The Guardian, the wider battle between fossil fuels and renewables is still being played out. However, clean energy continues to make gains. International Energy Agency’s annual analysis This month’s release of renewables. According to the report, the world’s renewable energy capacity will increase by 30% in the next five-years, compared with what the agency predicted last year.

The accelerated growth is being driven by India, China, the United States, the European Union and the United States. Most of this growth is coming from solar and wind power. Renewables are expected to become the largest source of global electricity generation by 2025, and solar is expected to surpass coal as the world’s largest power source by 2027, the report said.

California’s transition towards renewable energy will depend on budget surpluses, new technologies, and other factors. But state lawmakers aren’t likely to escape the powerful political prod of gas prices anytime soon.

To Vince Fong, one of 18 Republicans in the 80-member California State Assembly, Newsom’s urgency and rhetoric suggest he’s more interested in scoring political points than addressing the factors that contribute to prices at the pump.

Fong, whose Bakersfield neighborhood is a major oil industry hub, said that Fong has lost sight of the essential aspects of the supply-demand relationship in the energy market. “He’s trying to make headlines and he’s demonizing the very people who power California.”

Newsom called it a windfalltax before the penalty was officially introduced to the Legislature.

The Democratic leaders of the state’s Senate and Assembly said then that taking “excessive profits out of the hands of Wall Street” and transferring them to consumers deserved “strong consideration” by the Legislature.

By this week, neither the leadership offices had changed their public positions.

“The speaker is still reviewing this proposal, and looks forward to discussing the issue with his colleagues,” Katie Talbot, spokeswoman for Assembly Speaker Anthony Rendon, said in an email Tuesday.

Record profits aside, California’s gas market is unique in a number of ways.

California does not have any crude oil pipelines. Refiners in the state have to produce cleaner gasoline from crude oil than other states, meaning other states’ gas can’t be supplied directly to California stations.

The high fuel standards cost more, and California imposes the second-highest excise tax — after Pennsylvania — on wholesale oil. Additionally, the state imposes higher taxes on fuel than other states.

For a long time, those factors accounted for the difference between California’s gas prices and the national average, Gordon Schremp, a senior fuels specialist at the California Energy Commission, said at a Nov. 29 hearing.

ExxonMobil Refinery Torrance in 2015 experienced an explosion of a processing unit, temporarily reducing supply. Schremp explained that the price rises of refiners drove up profits and did not return them to their pre-explosion levels.

California’s demand for gas peaked in 2017 and has been declining since, due to electric vehicle uptake and the pandemic’s shift to remote work, Schremp said. Next year, demand is expected to drop to 12 percent below 2019’s levels, he said.

California lost almost 10 percent of its refining capacities since 2019, while the national loss was 4.3 percent.

Limited competition is a factor in California’s prices. Just five companies — Chevron, Marathon, Valero, PBF Energy and Phillips 66 — produce the vast majority of gasoline sold in the state.

Hackett, from Stillwater Associates, claims that California has twice as many licensed drivers per gasoline station than any other country. Shell and 76 are the most prominent branded retailers that operate stations.

“We just don’t have the competition and discipline from those off-brand stations,” said Severin Borenstein, a UC Berkeley economics professor and former chairman of the Energy Commission’s now-dissolved Petroleum Market Advisory committee.

Borenstein and Hackett each believe competition needs to be addressed as part of California’s solution to persistently high gas prices — spikes or no.

“There’s a problem with insufficient competition that regulatory changes should at least be considered for,” Borenstein said.

Court, of Consumer Watchdog, said that if the profit margin threshold in Newom’s proposal is sufficiently high, companies will still be able to earn plenty of money in California’s enormous market. In his view, oil companies aren’t so different from other businesses that must justify price increases to regulators.

“We’ve done this before with insurance, we’ve done it before with utilities, we’ve even done it with cellphones,” he said.