Special Session Hearings Prove Case for Proposal to Prevent Gas Price Spikes

What you need to know: The first hearings of the special session highlighted the incentives that the oil industry has in letting gas prices spike - and that they have no interest in fixing it any time soon.

SACRAMENTO - The Assembly hosted its first hearings of the special session on gas price spikes this week. 

The takeaway? Gas price spikes are preventable with additional backup supply but profit motives keep the industry from responsibly maintaining the supply necessary to protect Californians. Learn more about the Governor’s proposal here.

Profit incentives drive decisions to let supplies dwindle, allowing prices to spike

- “Private sector firms have [an] incentive and obligation to earn a profit, and so their decisions about how much to store for a rainy day are determined by profit incentives, and in particular, holding onto additional product so you can sell it when prices are high and drive down prices can cannibalize the money you’re already making during that period.” - Neale Mahoney, Stanford University Professor of Economics

- “Their primary focus in that decision is what’s gonna be best for their profits. They don’t want to hold inventory and have that storage cost and all of that, unnecessarily. But if they can hold inventory because they think down the road they could be able to sell it to a higher priced market, they may make those decisions. But the decision, basically, on inventory, or one of the primary things, is simply their profits, correct?” - Assemblymember Steve Bennett
              -- “That is correct, Member Bennet, these companies have an obligation to maximize profits for their shareholders.” - Neale Mahoney, Stanford University Professor of Economics

Minimum inventories - utilizing existing storage - would prevent gas price spikes

- “My view is [that] when we have a price spike, that a responsible system would have product on hand [and] would have anticipated the potential of there being a refinery turnaround, a refinery outage, something else. And that product could be deployed to bridge us to the point where a refinery came online or where product could come in from overseas. That decision may not be the profit-maximizing decision for firms that are trying to make the most possible money. But in terms of serving the California people by preventing budget-busting price spikes, I think that is something that would be desirable.” - Neale Mahoney, Stanford University Professor of Economics

- “This additional supply, this additional buffer would be available when prices go up to help stabilize the market… The problem with this concentrated market with the four firms is they don’t currently have the incentive to keep inventories high enough to protect against price spikes. And I can say that the proof is before us in the price spikes that we’ve been experiencing - and so there has to be a mechanism to encourage that more responsible level of storage to prevent the price spikes.” - Tai Milder, Director of the state’s Division of Petroleum Market Oversight  

- “I keep hearing about the need to build new tanks but this is a minimum inventory requirement. In other words, it kicks in at the time when inventories are very low so there should be plenty of capacity for storing that gasoline.” - Severin Borenstein, Professor of Economics at UC Berkeley  

- “When refineries go down, prices go up, profits go up… There’s an intersection of inventory dipping under 15 days, the price spiking, the profit spiking.” - Jamie Court. President of Consumer Watchdog

Industry has no interest in fixing gas price spikes

- “We are also here to evaluate a proposal that is on the table and so if you don’t think this works, then you need to explain to this committee why it doesn’t work.” - Assemblymember Cottie Petrie-Norris addressing the oil industry
              -- “You’ve heard a fundamental disagreement about whether refiners do or do not have enough storage capacity.* We disagree… We fundamentally believe that we’re being set up for failure.” - Eloy Garcia, Western States Petroleum Association (*fact check: there is enough storage capacity, according to CEC/DPMO analysis and outside experts)

- “We have to realize there’s a tremendous incentive to make sure that these inventory decisions and these pricing decisions remain in the hands of industry and we don’t get involved at all to make sure that the public’s benefit is also considered… What we’ve seen for the last four weeks is a tremendous amount of confusion and misrepresentation to try to block or weaken this legislation.” - Assemblymember Steve Bennett

- “How do we fix this problem, in your mind?” - Assemblymember Mike Gipson
              -- “I don’t think you can. I think that all you can do is make it worse is one person’s humble opinion. But if you step back and understand the motivations of all of the players in the industry, they’re working every day to make the system work well, just stuff happens… I think [the system] works pretty well. We end up with price spikes, there’s no doubt about that, and we end up with some outages and we end up with some problems.” - Tom Robinson, Chairman, Robinson Oil

Industry’s solution? Drill, baby, drill!

The Western States Petroleum Association’s primary point was that this could all be solved if we just let them drill for more oil in California.

It’s a tired, decades-oil talking point - and a distraction from real solutions. Never mind the fact that oil production has been on the decline in California since the 1980s. Don’t take it from us, take it from the experts:  

- “California oil production is really unrelated to California gasoline prices. California oil production is part of the world market. I’ve been hearing this argument - there’s a new one here that maybe pipelines will shut down. But the same argument about California oil production has been made for years… I think we have to keep in mind that even the oil industry, when prices go sky high, say, ‘this isn’t us, we don’t set the price of crude oil, the world market does.’ But that same argument shows us that additional California production is not going to significantly affect California prices.” - Severin Borenstein, Professor of Economics at UC Berkeley