Gasoline prices have hit their highest national average in six years with an average price of $3.076 per gallon on June 15, 2021. Gasoline prices were on the rise when the Organization of the Petroleum Exporting Countries (OPEC) left production cuts in place and the Biden administration halted federal oil and gas leases, canceled the Keystone XL pipeline, and suspended leases in ANWR—all sending negative signals regarding U.S. supply responses. These problems were exacerbated by the cyberattack on the Colonial pipeline last month. Accentuating the price hike is the shortage of tank truck drivers, who transport gas to local stations—a problem that was increased by the coronavirus pandemic.
Elevating the average gas price for the nation is California, whose gasoline prices are the highest in the nation. As of June 15, California’s gasoline prices currently average $4.226 a gallon—$1.155 more than the national average. California pays more for gasoline than any other state because of a higher-octane fuel blend, higher state taxes, and environmental regulations.
California has long had higher taxes on gasoline than other states. But, in 2017, the state legislature raised the tax by an additional 20.8 cents a gallon over a three year period. At the start of this year, California drivers were paying on average 63 cents a gallon in state and local taxes, compared with the 50-state average of 36.8 cents. Despite the claim that the gas tax increase was needed to repair deteriorating roads and bridges, California used much of the proceeds toward projects to reduce greenhouse gas emissions, such as bike lanes and mass transit. The state Department of Transportation recently reported that the gas tax increase would only finance half of the repairs needed.
The California Air Resources Board (CARB) also imposes a de facto carbon tax through its cap-and-trade program. Since 2013, refiners, oil producers and manufacturers have been required to reduce emissions or buy credits to offset them. The cap-and-trade program adds about 14.3 cents a gallon to the retail price of gasoline.
Special Gasoline Blend
CARB requires gasoline retailers to sell a special extra-clean-burning gasoline blend, which adds another 10 cents a gallon to the gas price.
Gasoline supply in California is tight because out-of-state refineries are not configured to produce CARB’s special fuel blend. Many refineries in the state have closed in recent years because of onerous environmental regulations. As a result, whenever one or two large refineries experience a temporary outage, prices soar, often by 50 to 60 cents a gallon. California is expected to lose two large gasoline-blending refineries permanently.
Low-Carbon Fuel Standard
In 2011, CARB implemented a low-carbon fuel standard, which requires refiners to reduce the “carbon intensity”—meaning total emissions from production, transportation, refining and combustion—of the gasoline they blend, expressed as a ratio of mass emitted to energy produced. Under the “carbon intensity” program, CARB assigns carbon-intensity scores to fuels. For example, Saudi Arabia’s Arab Light crude rates 9.23, West Texas Intermediate 11.93, California 29.33, Canada’s oil sands 29.49, corn ethanol 70, and biodiesel from cooking oil 23. Refining, transportation and vehicle combustion add another 90 or so to the carbon-intensity of these oil types. As a result, gasoline produced from oil drilled in California’s Central Valley has a total carbon-intensity score of 120.
CARB requires refiners to meet a declining average carbon-intensity score—90.74 for this year—by blending more lower-carbon fuels. If they do not meet the benchmark, they must buy regulatory credits, usually from renewable-fuel producers and electric utilities. As the state’s carbon-intensity benchmark falls, regulatory credit prices increase. From 2012 till the first quarter of 2021, regulatory prices have increased by nearly a factor of 12—from $17 on average in 2012 to $198 in the first quarter of this year. An analysis estimated that the program would add 24 cents a gallon to the price of gasoline this year and 63 cents by 2030.
The high costs of complying with the state’s low-carbon fuel standard is causing some larger refiners to switch to producing renewable fuels, which have become much more profitable due to regulatory and tax credits. Producers of West Coast renewable diesel make on average $5.53 per gallon including regulatory and tax credits—almost three times as much as for regular diesel. Marathon Petroleum announced plans to convert its large refinery in Martinez, California to a renewable diesel plant. Phillips 66 plans to overhaul its San Francisco refining complex to produce renewable fuels, from grease, soybean oil and other cooking fats
CARB awards regulatory credits to utilities whenever their customers charge electric cars at home, which utilities can sell to refiners. They are required to use the money from their credit sales to subsidize electric cars. Californians get subsidized a $1,500 rebate from their local utility, $2,000 from the state and $7,500 from the federal government for buying an electric vehicle. This $11,000 subsidy is one of the reasons California leads the nation in electric vehicles.
California’s gasoline prices are the highest in the country at $4.23 a gallon and national average gasoline price is $3.076—the highest in 6 years. California’s gas price is over a dollar higher than the national average because of special fuel blends the state requires, direct and hidden taxes, and regulatory policies. The low-carbon fuel standard, for example, requires petroleum producers to pay a regulatory credit if they fail to meet the standard, which is added to the price that drivers of gasoline-powered cars play for fuel.
Gasoline prices in California could increase to over $5 a gallon at the pump as the state’s green mandates ratchet up and gasoline refineries shut down or convert to renewable fuels. While Californians, who are sick of paying more than $100 to fill up their tank, can move to another state, it may prove fruitless if Biden gets his way. Stephen Chu, the Secretary of Energy under the Obama-Biden administration suggested that “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe,” when prices there were in the $7-9 per gallon range.
Environmentalists want Biden’s Environmental Protection Agency to emulate California’s low-carbon fuel standard as a way to subsidize electric vehicles, which Biden wants to proliferate to reach his net zero economy by 2050. Consumers should expect gas prices to increase if governmental regulations and actions make it more expensive to produce, refine, transport, and consume the fuel that makes their daily lives possible.