To Keep Prices Low, California Will Raise Prices

California Governor Gavin Newsom signed a bill this week that could force local refineries to stockpile fuel, a move he believes will smooth long-term gasoline prices.

“Price spikes have cost Californians billions of dollars over the years, and we’re not waiting around for the industry to do the right thing,” Newsom said. “We’re taking action to prevent these price spikes and save consumers money at the pump.”

Once the California Energy Commission outlines the new set of rules, refineries could be fined as much as $1 million per day for non-compliance. That massive figure doesn’t alarm Newsom, who says it’s time justice is done.

“They’re screwing you; they’ve been screwing you for years,” he said of oil companies.

But, as critics have been quick to point out, forcing suppliers to hold inventory could dramatically raise operating costs. Even if the new legislation does prevent price spikes—an outcome that’s far from certain, given the unpredictability of economic shocks—consumers will pay for future lower prices with higher prices now. That’s if producers don’t simply pack up and leave.

“The uniqueness [of California regulations] on top of uniqueness on top of uniqueness has made this not the kind of environment that refiners want to continue to invest in,” said Eloy Garcia, lobbyist for industry group WSPA. “You are further and further making this a unique refining environment when you need refiners to stay in California.”

Consistently high prices are a bigger problem than spikes, many say. Even in its ideal form, the new legislation only aggravates this immediate problem.

“Even if, in theory, it stops price spikes, it still doesn’t bring them down,” said Nicolaus Assemblyman James Gallagher. “And the problem is the price is too damn high, right now.”

Experts estimate that creating the storage tanks required to meet the new requirements could take nearly a decade and cost “tens of millions of dollars.” That stockpile will be costly to maintain and comes with its own host of problems.

“Once you have inventory like this, it is going to be very tempting for whoever has political power to try to release that inventory when it is helpful to them to push down gasoline prices,” UC Berkeley economist Severin Borenstein said in a recent hearing.

Others have pointed out that worker safety and jobs could be at risk from the legislation. Cost-cutting measures to pay for new construction would likely involve layoffs and job cuts. Workers who are unfamiliar with the maintenance procedures and dangers of massive storage tanks could be thrown into an on-the-job crash course, leading to cut corners and errors due to inexperience.

It’s an open secret that oil stockpiling to prevent supply disruptions “works,” at least for policy purposes, on a national level. The federal government manages the world’s largest emergency petroleum reserve, commonly known as the SPR. But there’s a critical difference between that national plan and the California legislation, and that’s how much competition the rules allow. The U.S. government purchases oil from suppliers and undertakes its own inventory management and storage procedures. Newsom shifts that burden onto suppliers, forcing them to hold reserves they would prefer to sell immediately, penalizing noncompliance with fines rather than incentivizing compliance with payment.

Both policies raise oil prices for consumers, but likely by different amounts, and certainly in different ways. The national stockpile raises prices by reducing supply, a feature of a competitive market whenever a large buyer is involved. The California stockpile raises prices by forcing operating costs to rise, a feature of a regulated market where producers are required to perform at reduced efficiency.

Hence the age-old question of economics, which so many well-meaning politicians forget to ask: Is the tradeoff worthwhile? What kind of precedent does this local regulation set for the economy as a whole?

For Newsom, the move is an unequivocal win for consumers—and it’s only the beginning of a larger plan for government intervention to force prices down, despite the best efforts of profit-seeking suppliers.

“[Gas companies] continue to lie, and they continue to manipulate,” Newsom said. “They have been raking in unprecedented profits because they can.”