SACRAMENTO, Calif. — Gasoline prices in California are often higher than the national average, thanks in part to a limited number of suppliers who can meet its tougher fuel specifications, costs of its cap-and-trade program and a Low Carbon Fuel Standard, among other factors. But a new study commissioned by Gov. Gavin Newsom has determined that the prices at some branded sites are so high they defy explanation—and the governor is calling for an investigation into possible illegal practices.
In October, the California Energy Commission (CEC) published a report that found Californians paid an average of 30 cents per gallon (CPG) more than the average American at major brand sites such as 76, Chevron and Shell. This equates to an additional $4.50 for each 15-gallon fill-up.
The CEC report said that although these branded outlets present their fuel as higher quality than that sold at lower-priced brands such as Arco and hypermarkets, “given the high standards of all gasoline in California, there is no apparent difference in the quality of gasoline at retail outlets in the state,” it said. “The name-brand stations, therefore, are charging higher prices for what appears to be the same product.”
The agency said it requested information from these brands to back up their quality claims but received no response. It concluded that the California Department of Justice would be best equipped to further investigate the issue.
The CEC studied the issue after Newsom asked the agency in April to examine the causes of California’s higher gas prices relative to the national average. In May, the CEC released a preliminary report that found the differential between California and national averages rose as high as $1 per gallon in April 2019. After weighing factors such as California’s higher regulatory costs, the CEC found an “unexplained” price increase in the past five years and suggested causes could include refiners’ margins, refinery outages, crude oil prices and retail margins. The latest report examined these factors and ruled out most of them—including refinery margins and outages and higher crude prices. Instead, it pointed to inexplicably high retail margins as a clue.
“The CEC has concluded that the primary cause of the residual price increase is simply that California’s retail gasoline outlets are charging higher prices than those in other states,” the report said. “While all retailers in California have increased their retail margins above the national average, higher-priced brands such as 76, Chevron and Shell have increased those margins far beyond their competitors.” The report estimates that California consumers have paid an extra $11.6 billion in the past five years because of these higher retail margins.
Illegitimate Reasons?
According to the CEC’s report, the average retail margin in California was equivalent or below the national average from 2004 to 2010. However, from 2015 to 2017, the California retail margin rose an average of 19 CPG. Also, higher-priced brands such as 76, Chevron and Shell had retail margins nearly double that of lower-priced retailers—in particular, Arco and hypermarket sites such as Costco and Safeway.
The report said that even when these major brands increased the price of fuel at their sites, they did not lose any market share, counter to economic assumptions. It speculated that consumers continued to buy fuel from these brands because of factors such as location, credit cards and their loyalty to the brand, as well as their perception that the fuel quality was higher, based on the brands’ marketing claims. Familiar brands in California such as 76, Chevron, Shell, Exxon, Valero, Costco and Arco are also Top Tier-certified, meeting a detergency standard. Many major brands also make their own claims of higher quality thanks to proprietary additive packages. The CEC considers all these reasons to buy the higher-priced fuel as “legitimate.”
“Illegitimate” reasons could include price fixing and false advertising. The CEC said it has no proof that these fuel brands engaged in these practices, although it said it also cannot rule them out.
In response to the study, Newsom asked California Attorney General Xavier Becerra to investigate for possible wrongdoing. “There is no identifiable evidence to justify these premium prices,” Newsom said in a letter to Becerra. “If oil companies are engaging in false advertising or price fixing, then legal action should be taken to protect the public.”
Critics of the report argue it did not factor in California’s high labor, utility and rent costs, and taxes. An editorial in The Wall Street Journal cited Bureau of Labor Statistics showing that the wages of workers at gas stations in California rose 50% higher in the past five years than those of employees in the rest of the country.
Catherine Reheis-Boyd, president of the Western States Petroleum Association, told USA Today that her group was still reviewing the report. However, she pointed out that California’s fuel taxes and standards make up $1.07 of the retail price of each gallon of gasoline.
“Everyone has to have a seat at the table to ensure policies provide adequate, affordable, reliable energy to the communities we serve,” she said.
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