Oil refiners in California saw lower-than-average margins in the past few months in an unusual twist where lower operating capacity did not automatically lead to higher margins.
According to new data from the Energy Information Administration, the shrinkage in refining capacity did not lead to fatter profits because refiners increased the existing capacity's utilization rate.
California has the most expensive gasoline of all the states, mostly due to regulations that have seen the tax load on gasoline swell continually, with the highest excise duty in the United States. The latest tax hike occurred just this month, seeing the total excise duty on gasoline reach $0.596 per gallon.
However, California consumer groups and the Governor's Office have blamed high gas prices on refiners, threatening to penalize them for alleged price gouging. In March this year, for instance, more than 20 consumer groups decried the average refining margin of $1 per gallon for refiners in the state, calling on state regulators to investigate potential price-gouging.
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"California's oil refiners reported to the Energy Commission that their average gross refining margin from selling gasoline in the California gallon in 2023 was $1.01 per gallon," the groups wrote in a letter to the state's Energy Commission and Governor Gavin Newsom. "A buck per gallon is too much for oil refiners to take for profit and overhead when working people have to choose between paying for food and filling up," they noted.
The California legislature responded to these allegations by adopting a new law allowing the authorities to cap refiners' profits whenever they deem fit. "These new transparency laws will help us track refiners' profits and shine a light on price manipulation so Californians aren't vulnerable to the greedy whims of Big Oil," Governor Newsom said last year as the legislation was being discussed.
Chevron, the only Big Oil major based in California and a top target for anti-oil legislation in the state, warned a couple of months ago that the new legislation would create difficulties for industry players and ultimately hurt consumers.
The company noted that the profit cap legislation would discourage refining investment, which has already declined consistently over the last decade, and compromise fuel supply security for drivers in California.
Yet, the EIA data about refining margins in California suggests local refiners are doing what they can to secure that supply, even as prices keep climbing. But as refiners produce fuels, consumption is on the decline, too, what with California being the EV capital of the States. The Governor's Office earlier this year boasted that over the past 10 years, EV sales in California had gone up by 1022%, with one in four new cars sold in the state to date being an EV.
This, however, still, leaves three internal combustion engine cars for every electric vehicle sold, meaning that demand for fuels is still quite robust, even if it is declining. The decline, moreover, could be a temporary thing—in 2022 and 2023, the crack spreads for West Coast refiners were above the five-year average, the EIA noted in its report.
It would be good news if those California refiners' crack spreads rebound, too. That's because California has seen its fuel imports from other states rise by 40% over the past 24 years. In other words, if California refiners don't make enough fuels cheaply, others elsewhere will. Californian authorities can strangle the local downstream industry, but other states are taking care of their refiners, who would ultimately benefit from California's continued dependence on oil products, EV capital or no EV capital of the States.
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By Charles Kennedy for Oilprice.com
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