California wants some insurance against pump prices. But in proposing that oil companies there hold a minimum stockpile of fuels, the state is also, and less obviously, seeking insurance against the complications of its own energy policies. In seeking to kill off gasoline demand but ensure suppliers stay engaged for years to come, the state is confronting one of the central challenges of the energy transition.
The backstory here concerns gasoline prices in California spiking above $6 a gallon in 2022 and 2023. Worse, while the whole country suffered higher pump prices after 2021, California’s were notably higher and more volatile, prompting accusations from Governor Gavin Newsom that the oil industry was gouging consumers.
There’s a backstory to the backstory. California’s gasoline market is isolated from most of the US, with no significant pipelines crossing the Rockies and Jones Act requirements making it pricey to ship barrels in on the water. As with any isolated market, supply disruptions can cause big jumps in the prices of vital goods — which is what happened with gasoline in 2022 and 2023 as unexpected refinery outages tightened supply.
California is also isolated by choice. The state mandates a smog-reducing gasoline blend that differs from elsewhere. In addition, it taxes gasoline more heavily, with various state charges adding more than a dollar per gallon at current prices (alongside the federal tax of 18 cents). Plus, the state leads the way on vehicle electrification, with sales of new models sporting internal combustion engines mandated to end by 2035.
There is a tension between California’s green aspirations and present gas-guzzling reality that this stockpiling proposal captures perfectly. It concerns the nature of any energy transition — which is that it is a transition.
California’s emphasis on electric vehicles sends a signal to oil refiners that their time is limited, yet the state also needs them to keep running for years to come. The state’s refining capacity has dropped about 12% over the past five years. Import dependency has doubled relative to the average in the five years prior to the pandemic, accounting for about 9% of demand in the first five months of this year. The industry has also become more concentrated: There were 14 operating refineries in the state at the start of the year, down from 21 a decade ago. This makes California more vulnerable if a refinery goes down unexpectedly.
In theory, setting a minimum stockpile requirement for refiners and distributors mitigates that vulnerability by providing a bigger buffer against the unexpected; a bit like the Strategic Petroleum Reserve. The difference with the SPR, which is funded by the federal government, is that a minimum stockpiling requirement would be funded by the industry.
What that cost would be is unclear, though gasoline is more expensive to store than crude oil because it degrades over time. The Northeast Gasoline Supply Reserve of 1 million barrels, just liquidated by the Biden administration, cost almost $20 million a year to maintain — far more than the SPR on a per barrel basis — and California’s incremental stockpiling would presumably add up to several million barrels of gasoline at least.
For in-state refineries, the extra inventory would impose a carrying cost, which would assuredly be passed on to drivers. In addition, its existence would suppress price increases in general — that is, after all, the point — thereby reducing the incentive to invest in or maintain capacity.
As much as this might seem like free insurance for consumers, it wouldn’t be. “The more you add to costs, at some point a business says ‘I don’t want to operate here anymore,’” says Austin Lin, an analyst at Wood Mackenzie, an energy-sector consultancy. Combined with the policy objective of squeezing gasoline demand down, it raises the possibility of more plants shutting sooner than later. That would exacerbate the challenges of mismatched supply and demand and capacity concentration at fewer sites that leave the market vulnerable to price spikes in the first place.
This problem crops up elsewhere in transitioning energy markets. Rising penetration of renewable energy on grids tends to suppress wholesale electricity prices, discouraging investment in traditional power plants that, while destined to be phased out under net-zero objectives, remain necessary today. This has spurred workarounds such as capacity auctions and, in California’s case, just paying old gas-fired plants to stay open.
The point here isn’t to abandon the energy transition. But as our established energy system’s economics get eroded, we need mechanisms, ranging from auctions to outright subsidies, to ensure it continues functioning. These come at a cost. California’s stockpiling proposal recognizes the problem and the need to insure against it, but rather elides the thorny issue of how the premiums ultimately get paid.
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