Golden State Today

The Assembly hosted its first hearings of the special session on gas price spikes this week in Sacramento. The discussions underscored that while gas price spikes are preventable with additional backup supply, profit motives deter the oil industry from maintaining necessary reserves to protect consumers.

Neale Mahoney, a Professor of Economics at Stanford University, highlighted the industry's profit-driven decisions. “Private sector firms have [an] incentive and obligation to earn a profit," he said. "Their primary focus in that decision is what’s gonna be best for their profits."

Assemblymember Steve Bennett echoed this sentiment, emphasizing the industry's reluctance to hold inventory due to storage costs unless higher future prices justify it. "These companies have an obligation to maximize profits for their shareholders,” Mahoney confirmed.

The hearing also discussed potential solutions like maintaining minimum inventories using existing storage facilities. Mahoney suggested that a responsible system would anticipate refinery outages and keep enough product on hand to bridge any gaps until refineries resume operations or new supplies arrive from overseas.

Tai Milder, Director of the state’s Division of Petroleum Market Oversight, noted that having an additional supply buffer could help stabilize market prices during spikes. However, he pointed out that the current market concentration among four major firms does not incentivize high enough inventories to prevent such spikes.

Severin Borenstein, Professor of Economics at UC Berkeley, addressed concerns about storage capacity. He clarified that minimum inventory requirements should kick in when inventories are low and argued there should be ample capacity for storing gasoline under these conditions.

Jamie Court, President of Consumer Watchdog, added: “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.”

Industry representatives expressed skepticism about the proposed measures. Eloy Garcia from the Western States Petroleum Association contended that refiners do not have enough storage capacity and felt they were being set up for failure.

Assemblymember Cottie Petrie-Norris urged industry stakeholders to provide concrete reasons if they believed the proposal was unworkable: “If you don’t think this works, then you need to explain to this committee why it doesn’t work.”

Steve Bennett emphasized public interest over industry profit motives: “We have to realize there’s a tremendous incentive...to make sure that the public’s benefit is also considered.”

Tom Robinson, Chairman of Robinson Oil Company, argued against regulatory intervention: "I don’t think you can [fix this problem]. I think all you can do is make it worse."

In response to suggestions from industry representatives advocating increased drilling as a solution, Severin Borenstein dismissed such arguments as outdated distractions. He explained that California oil production has been declining since the 1980s and has minimal impact on local gasoline prices due to its integration into global markets.

"California oil production is really unrelated to California gasoline prices," Borenstein stated.

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