Will Gov. Newsom’s gas-saving plan really keep prices from rising at the pump?

If you drive a car or truck in California, you’re worried about gas prices, especially if they rise to $7 a gallon in September 2022.

You may have heard that Gov. Gavin Newsom has called a special session of the Legislature to consider legislation designed to prevent such price increases. It allows the state to maintain minimum stocks of gasoline at California refineries. The special session will begin with hearings on a bill to pave the way for the funding. Here’s a primer on the matter:

What is Newsom’s plan?

If the legislator approves the minimum inventory count, California refineries may be required to keep extra gasoline on hand so that prices don’t spike at the pump when the plant shuts down for unscheduled maintenance or an unplanned problem. That’s the theory anyway. The California Energy Commission is tasked with deciding whether the reserve should be created and how big it should be.

Where is this gasoline stored?

It depends on how big a pool the state can set up. Excess capacity from existing storage tanks may be enough. Additional storage tanks will need to be built, and could cost about $35 million per tank, according to the industry. California refineries typically have 15 days or more of inventory on hand, which shrinks to a few days when refineries are shut down for storage, the state’s newly formed Oil Market Watch reports.

Who pays for gasoline storage?

Oil refining companies.

How much does it cost?

Yet to be determined.

Aren’t these costs passed on to consumers?

However, they may be evenly distributed throughout the year until the government decides how much and how to manage the gasoline stock, how much money and how it can be compared to a temporary increase in prices.

Is there a plan for more?

Yes. The law allows the energy commission to impose minimum inventory “requirements” not only for gasoline, but also for stocks of feedstocks and blending components used to create the final gasoline product. It also requires refiners to seek demand to reduce the required inventory level during times of high demand.

The commission can impose civil penalties of up to $1 million per day for noncompliance. Refineries must provide evidence that any loss of production during storage will not negatively impact California’s transportation fuel market.

What is the California Energy Commission?

The commission was established as a policy and planning agency in 1975 in response to the energy crisis of the 1970s. For decades it has served as the state’s primary source of energy statistics and analysis. The state legislature has granted the commission more investigative and regulatory powers in recent years, including state management of the electric vehicle charging system. The Petroleum Market Oversight Unit, established in 2023, falls under the umbrella of the Energy Commission and is headed by an attorney with extensive experience in antitrust law.

Does the commission have experience in managing oil refineries?

It appears to be a work in progress. In an email, Siva Gunda, vice chair of the commission, wrote: “The California Energy Commission has over four decades of experience in the oil industry as part of our responsibilities under the Oil Industry Accountability Act. Our long experience through new tools and transparency, offered by this company, has become even stronger through the (2023) California Gas Price Increase and Transparency Act. Contracts with foreign experts will further enhance our opportunities.”

The new legislation establishes a committee of six experts who “have a scientific position or demonstrate expertise in the economics or commercial operations of the transportation fuel market.” However, a person who has worked in the oil and gas industry during the past 12 months cannot be a member of the commission.

What does the industry say?

“California policymakers and regulators lack the technical expertise to micromanage plant maintenance and construction or to impose fuel inventory mandates on the private sector,” said Susan Grissom, chief analyst for the trade group. American fuel and petrochemical producers.“In effect, this law disqualifies those with real-world experience from offering such guidance. This type of interference by Sacramento is intentionally reckless and has the potential to compromise safety and damage the regional fuel supply chain.”

Any response from the governor to this?

Through a spokeswoman, Gov. Newsom and his top climate adviser, Lauren Sanchez, declined to comment.

What about the subject matter experts?

Severin Borenstein, a UC Berkeley professor who heads the Haas Energy Institute, said the inventory mandate could end up raising prices a bit, but his research shows the main problem is happening near the retail level, where pricing remains opaque. The state is investigating what Borenstein called it.secret surcharge“but did not reach any conclusion.

The governors of Arizona and Nevada have spoken out against this plan. Why?

Most gasoline in Arizona and Nevada is imported by pipeline from California, New Mexico and Texas. Arizona Gov. Kathy Hobbs, a Democrat, and Nevada Gov. Joe Lombardo, a Republican, sent card and news which says, among other things: “Despite ongoing discussions about the primary causes of fuel price increases, it is clear that increased regulatory burdens on refineries and forced supply shortages are driving up costs for consumers in all of our states. While both of our states rely on California pipelines for much of our fuel, these rising costs and supply shortages are of great concern to Arizona and Nevada.”

In a letter to the energy commission, the Arizona Petroleum Marketers Association said: “If refiners are required to prioritize California’s reserve requirements, this could reduce fuel shipments to Arizona, create supply shortages and potentially lead to a fuel shortage in our state. This could have a significant impact on fuel availability in Arizona and cause widespread shortages.”

Has any state attempted inventory control before?

No. California is setting the pace. In 2023, Made in Australia gasoline stocks. Unlike the California plan, the reserve was created for strategic geopolitical reasons. The country imports more than 90% of its gasoline. Although private industry pays most of the cost of the reserve, Australia has provided hundreds of millions in government funding.

What’s happening with the US strategic petroleum reserve?

This is crude oil, not gasoline. Built in response to the energy crisis of the 1970sReserves may reach up to 700 million barrels of oil, most of which can be stored in underground salt caves. Although it is intended to be a pillow during the war or other emergency, presidents sometimes release oil reserves to soften retail gasoline prices.

The United States has maintained an emergency supply of gasoline, the Northeast Gasoline Reserve. It was created in 2014 in response to Hurricane Sandy, which severely damaged two oil refineries and destroyed 40 fuel terminals. But recently sold out without an upgrade plan.

When will the California Gasoline Reserve be established?

Not in time for any price increases in the fall. If the government goes ahead with the extraordinary measure, the rules and regulations could be in place by the end of next year.