Why does gas cost so much in California?

California boasts the biggest population of any state, the largest manufacturing base and agricultural harvest, and the highest waterfall and lowest valley. But the Golden State has recently laid claim to a less illustrious distinction: home of the nation's highest-priced gasoline.

During this spring's gasoline price run-up, California inherited the title from Hawaii, the island state that relies almost entirely on expensive imported fuel. Even after recent declines, last week's state average of $2.57 outpaced Hawaii by 6 cents and the national average by 39 cents, according to the AAA of Northern California.

There are three major reasons that Californians pay more at the pump: far stricter environmental standards, a larger proportion of imported fuel, and higher taxes than most states. Though the oil industry vigorously denies it, some experts also believe consolidation and market manipulation play a role.

"There are very substantial barriers to entry that protect a very tight oligopoly," said Mark Cooper, director of research for the Consumer Federation of America. "When you get so few producers in an individual market, it's easy to raise prices even without colluding."

The industry itself stresses that 75 percent of the retail cost of gasoline consists of crude oil and taxes, both items beyond its control. The next biggest cause of California's high prices, refiners argue, is environmental regulation.

A patchwork of sometimes overlapping rules governs gasoline sold in California. Most notably, in 1991 the California Air Resources Board approved the nation's strictest gasoline rules, aimed at cutting emissions by one-third. It required most refiners to produce a reformulated gasoline, with limits on toxics such as benzene and hydrocarbons, by 1996.

An even more rigorous standard went into effect in 2004, after the state banned the fuel additive MTBE, which was found to leak into and pollute groundwater. Because the federal Clean Air Act required gasoline in most areas of the state to contain an oxygenate, which improves energy efficiency and cuts tailpipe emissions, refiners were forced to replace MTBE with ethanol.

State refiners invested nearly $6 billion to comply with these regulations, said Joe Sparano, president of the Western States Petroleum Association.

Recovering these costs together with the higher price of producing reformulated gasoline have driven the state's fuel 8 cents to 14 cents per gallon above conventional gasoline, according to the California Department of Energy.

But that money buys important air quality and health safeguards, according to environmental organizations.

The California Air Resources Board estimates the 1996 rule eliminated 1 billion pounds of emissions per year, the equivalent of taking 3.5 million cars off the road every day. In turn, the inhalation cancer risk dropped 46 percent from 1995 to 2002, according to a report by the Bay Area Air Quality Management District.

"In terms of a reduction in total pollution, it is one of the most efficient programs out there," said Roland Hwang, vehicles policy director for the Natural Resources Defense Counsel. "We are fighting for every ton of pollution reduction we can get, and there aren't other sources out there short of closing down power plants."

At the same time, however, those gains have been partially offset by the continual addition of cars to California roads, said Suzanne Garfield, a spokeswoman for the California Energy Commission.

That growing demand, tied to California's surging population, is also driving up prices as supplies are stretched to the limit. Indeed, during the past few years, California went from a net gasoline exporter to a net importer.

The environmental regulations exacerbate this constraint. Only a handful of outside suppliers produce California's "boutique" gasoline, and of the 22 state refiners, only 14 have made the necessary upgrades to produce it.

Severin Borenstein, director of the University of California Energy Institute, said the scarcity alone drives up prices, but it also "puts sellers in a position to jack up prices above competitive levels."

It's impossible to distinguish artificial scarcity from the legitimate variety, but together they've increased California prices another 15 to 18 cents, he said.

"There have been 30 studies and investigations over the last 20 years," said Sparano, specifically citing the U.S. Department of Justice, Federal Trade Commission and Government Accountability Office. "Each and every one of those reports have found that there has been no collusion, no manipulation, no managing of the market."

Sparano also disputes claims that oil industry consolidation has resulted in higher prices. But on this topic, the FTC and GAO part ways.

A 2004 GAO study of mergers from the mid-1990s through 2000 found the deals generally led to higher wholesale gas prices, up an average 2 cents in six out of eight modeled cases. In the other two, prices declined an average of a penny. Market concentration boosted California prices a much higher 7 cents on average, in part because of the highly specialized product.

The state impact was also magnified because the industry was more concentrated to begin with here, said Borenstein, who reviewed the study on behalf of the GAO.

A survey by the American Petroleum Institute found that, as of January 2004, California's average state and federal taxes on a gallon of gas were 50.8 cents. That's the fourth-highest of any state and compares with a nationwide average of 42.7 cents.

Mark Hinkle, a past chair of the Libertarian Party of California, calls this government gas gouging. Moreover, he believes that state government "meddling" is almost entirely to blame for high gas prices, because the regulations have increased the cost of producing gas while discouraging the construction of new refineries.

"These things just wouldn't happen if the government got out of the business of trying to manage the economy," he said.

But some environmental groups and public policy experts think there should be more, not fewer, taxes and regulations on gasoline.

Leondard Evans, author of "Traffic Safety" and a 33-year veteran of General Motors Corp., advocates steadily raising taxes on fuel because he believes only higher prices can curtail demand for the limited resource.

"We are addicted to a product produced by nations that are doing a great deal of harm in the world ... (and) if we use less fuel, we produce less carbon dioxide," he said.

Slowly, but surely. Be much better when she moves to CA and pays the high gas costs, ins, taxes etc. Outta my hair and outta my life.

Thanks fer askin'.

61 posted on 05/16/2005 2:21:13 PM PDT by BOBTHENAILER (One by one, in small groups or in whole armies, we don't care how we do, but we're gonna getcha)

It's a very simple concept: supply and demand. Works at both ends.

Get the Bugs and Bunny crowd to stifle exploration of local oil supplies, make development of alternative proven energy sources illegal, and at the other end allow "cartels" and 7th century neanderthals insisting we fund international terrorism; and there you have it.

You mean the overpaid civil servants in California don't you? They tax the hell out of us here. And yet we have probably the worst mass transit system of any state in the union. I hope the moronmentalists are happy with this result.

Using a charitable foundation, to use the law to force people to use your product, to use regulatory power to keep competitors out of the market or force them into selling or go bankrupt, and to protect you from liability for your product in order to reap a guaranteed profit is tax-exempt racketeering, and on a grand scale.

Brilliant Post. Thanks.

I've heard there are multiple formulations of gasoline in California based on geography, too, causing economy of scale problems. That is, "boutique formulations" are required for some areas, raising costs and prices.

Here is an 88 page PDF file which sets forth the California regulations on gasoline. Starting at about page 32, they list what gasolines may be sold where and when.

...nobody bitches about the cost of bottled water.

I think it's a messed-up world when water sells for more than fruit juice, cola drinks, and even beer or wine. Or Milk! There are alternatives to water, just people have allowed themselves to pay what they do for bottled water, due to claims of a higher purity. I saw a liter of bottled water at a movie theater for $4.00! That's ******* crazy! The stuff falls down from the sky four months out of the year! It comes out of faucets in nearly every house in America. And every public building. And it's drinkable. Beer, wine, soda pop and fruit juice are less pure than water, and they are cheaper.

Why does gas cost so much in California?

#1 No new refineries.
#2 Stupid additive requirements.
#3 Increased demand with the same supply.

water @ $1.29 per pint = $10.32 per gallon Now, tell me again about the high cost of gas?

Ok, so water is also overpriced!

Here's the story behind California's high gasoline prices

It comes out of faucets in nearly every house in America. And every public building. And it's drinkable.

I buy and drink bottled water for the taste alone. They chlorinate our water here in Clovis, CA. I never enjoyed pool water. We used to have some of the best tasting water, until they began telling us our water was contaminated with....???

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Strict environmental standards, demand and taxes drive price.