Jul 17, 2024

The drivers of California’s high gas prices have never been a mystery, but a new Independent Institute analysis provides a smart synopsis:

“The policy choices of politicians, regulators, and environmental lobbyists drive gasoline prices higher in California, not monopolistic behavior of producers. Higher gasoline taxes, stricter environmental standards, and unique fuel island effects are the culprits, and they hurt low-income families disproportionately … Only policy fixes, not political grandstanding, will bring relief to consumers.”

Speaking to Governor Newsom’s claims of oil company price gouging, the authors – economists Lawrence J. McQuillan, a Senior Fellow with the Institute, and Robert J. Michaels of Cal State Fullerton – were dismissive:

“Market fundamentals and institutions explain California gasoline prices without resorting to conspiracy theories inconsistent with economic logic and the available data.”

Their analysis calls California’s market for refined fuels “overly constrained, rigid, and isolated, resulting in slow adjustments and sharp price spikes.”

To fix those flaws and ease prices, the economists say California should make its fuel markets “more flexible, interconnected, and responsive, from the crude oil producer to the corner gas station.”

“California’s state and local governments have enacted restrictions on oil drilling, refineries, pipelines, new gas stations, new fuel pumps, and the gasoline itself, and also implemented a long list of taxes and fees. The cost of those policy choices acts as a surcharge on gasoline (at least 30 percent and growing) and is borne entirely by Californians.”

A key factor limiting flexibility in California’s gasoline market is the lack of pipeline connections to other states. Along with the Golden State’s specific fuel blending regulations, this self-imposed isolation “limits California’s ability to adjust to unforeseen events, and dependence on maritime shipping makes adjustments even slower and more expensive.”

Given this, the economists recommend “lifting restrictions on oil exploration and drilling … reducing restrictions on refinery and pipeline capacity … [and] reviewing California’s stringent and unique environmental regulations that increase gasoline prices …”

If Governor Newsom truly wants to provide relief through lower gas prices, the playbook has been written. But given the governor’s history of ignoring economists on these key questions, we’re not holding our breath.