UC Berkeley Econ Prof. Warns Newsom on Profit Caps for CA Refiners

Professor Severin Borenstein from the Energy Institute at UC Berkeley’s Haas School of Business, one of the preeminent experts on California’s energy market, expressed reservations about a budding effort by California Governor Gavin Newsom to implement profit restrictions and penalties on California refiners 

Soaring gas prices remain a top concern for many Californians, with state drivers paying an average of $5.17 per gallon, which is over $1.50 more than the national average. 

Borenstein, speaking to Politico last week, reacted to growing concerns from elected officials and drivers in Nevada and Arizona, who anticipate that California’s refinery profit caps could have consequences reaching far beyond the Golden State:   

POLITICO: I want to touch on the politics of this. You have this recent letter from Nevada Gov. Joe Lombardo to Newsom raising concerns about unintended consequences of this proposed profit cap. Newsom offered a tough response. You had an Arizona legislator appearing at a recent hearing. Could this all skew the outcome? 

BORENSTEIN: I’m not familiar with the letter, but if Lombardo is saying this needs to be thought through very carefully, I agree with that. I think that when we think it through very carefully, we might very well decide not to do this. But at the very least, we have to make sure that we’re not going to inadvertently create supply issues, or, more likely, put in place regulations that just will never have an effect. 

I think one can be skeptical of regulation without shilling for the oil companies. I’m certainly not shilling for the oil companies, and I am concerned that regulation could be either ineffective or have unforeseen consequences.  

The California Energy Commission’s (CEC) newly acquired authority to introduce profit caps and penalties on refiners comes as a result of SBX 1-2, the so-called anti-gas price gouging law which Newsom signed into law last year. Margin caps and profit penalties, critics say, would make refining gasoline more difficult and discourage investment in California’s energy supply infrastructure. 

Nevada Gov. Joe Lombardo sent a letter earlier this month to Newsom warning against enacting a profit cap on California refineries, setting off a war of words between the two governors. Politico reports 

“‘While we have no details on what this might look like, I’m concerned that this approach could lead to refineries either constraining supplies of fuels to avoid a profit penalty or even leaving our shared fuels market entirely,’ Lombardo wrote, pointing out that 88 percent of his state’s fuels are delivered from California via pipeline or truck. ‘Either scenario would likely lead to limited supplies and higher fuel costs for consumers in both of our states.’” 

Bipartisan Skepticism of Newsom Profit Caps on Refiners 

Based on a recent State Senate hearing on the implementation of SBX 1-2, the concerns expressed by Borenstein and Gov. Lombardo appear to be shared by politicians across both parties in California.  

Inglewood Democrat Sen. Steven Bradford, Chair of the California Senate Energy Committee, called on the Newsom administration to exercise caution in enacting energy price controls at the hearing earlier this month: 

“‘We want to have the confidence that the solutions will bring relief to Californians at the pump are real and not just aspirational,’ said Sen. Steven Bradford, an Inglewood Democrat and chairperson of the committee. ‘Far too often, we shoot first and ask questions later.’” 

State Sen. Josh Newman appeared equally skeptical at the May 7th hearing. The Fullerton Democrat asked a CEC official directly whether they had found any evidence of price gouging. Spoiler alert: they haven’t.   

SEN. JOSH NEWMAN: I guess to net margins generally, my understanding is correct me if I’m wrong, that your assessment so far did not indicate any clear evidence of price gouging in this marketplace is that correct? 

SIVA GUNDA: Yeah.   

Despite a lack of clear evidence on price gouging, the CEC told the legislators the Newsom administration is considering a profit “cutoff” that could come by the end of this year.  

Siva Gunda, the Vice Chair of the CEC, went on to testify the commission is evaluating the possibility that profit caps could cause oil companies to simply shut down operations in California. Should that occur, Gunda said, the state may have to contend with higher gas prices and consider “extreme options” including state control to keep refineries operating 

GUNDA: … if those go down, some extreme options might be on the table as a state. For example, what, Australia is doing after COVID, a number of refineries went out of business in Australia and the Australian government stepped in to subsidize and hold some of their refineries. So those are the things that might be on the table. 

As EID documented previously, such a scenario could cost California taxpayers billions. Australia, a country with two thirds the inhabitants of California, authorized $1.6 billion USD of taxpayer subsidies to keep two refineries in business following COVID demand shocks in 2021. 

Bottom Line: Independent experts and elected officials from both parties agree profit caps on California refiners could lead to supply constraints and unintended economic consequences. Newsom’s hypocritical effort to punish energy companies for California’s sky-high prices will only cause further pain at the pump, not only for the Golden State but for millions of drivers across Arizona and Nevada.  

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