Limited gas supplies drive California price spikes. Newsom’s reserve plan makes sense | Opinion

In September 2023, California gasoline prices spiked to $6.08 per gallon, up $1.22 from their average from April to July of that year. A cause of the price spike was refinery outages that reduced the supply of gasoline to the market. Gov. Gavin Newsom proposes to prevent future price spikes by increasing gasoline inventories to avoid shortages. He’s on the right track.

What happened last September was nothing short of a gut punch for millions of Californians. Families were forced to choose between busting their budgets or canceling planned Labor Day road trips. Small businesses were strained by the costs of transporting employees to worksites and products to customers. All told, prices were elevated for 105 days, and Californians paid $2.2 billion extra for gasoline.

In a well-functioning market, gasoline suppliers would have prepared for such a disruption, blunting any impact on prices. In-state suppliers would have built up reserves of gasoline. Out-of-state suppliers would have rushed gasoline to market, earning a profit while also driving down the pump prices in the Golden State.

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However, the California gasoline market does not function properly. Out-of-state suppliers cannot quickly bring gasoline to California due to our unique blend of gasoline and limited pipeline and port capacity. In-state suppliers are highly concentrated, with five companies controlling a whopping 98 percent of the capacity to produce California-grade gas. With so much market power, the incentives to build up robust reserves are limited. Why keep an extra 100,000 barrels in storage if it prevents price spikes and high profits?

As economists at Stanford University with policy experience in energy markets, we believe in markets. But at the same time, we also recognize that there are times when market failures call for well-targeted, economically-sound policy responses.

The California Assembly is holding a special session to consider the governor’s minimum inventory requirement to address price spikes like the one we experienced in September 2023. California refiners would be required to hold a minimum amount of gasoline in reserve. When there is a disruption in production, the inventory requirement would be lifted, allowing the emergency supply to flow into the market and putting downward pressure on prices. After the crisis has abated, refiners would be required to slowly refill their inventories in a phased manner.

Getting the details right matters. The proposal wisely sets up a commission of independent experts to develop and impose these requirements in consultation with key stakeholders. Decisions about when to release and refill inventories should be made in a data-driven way that is insulated from politics.

Critics of this proposal bring up three concerns, none of which hold water. First, they argue that the policy will force suppliers to build new storage tanks, with the costs passed on to consumers. This is wrong. The goal of the minimum inventory requirement is to ensure that our gasoline stocks do not drop too low, not to force them to unusually high levels.

A second concern is that the requirement would significantly increase gas prices in California and in neighboring Nevada and Arizona who import gas from our refineries. Again, this is incorrect. Properly implemented, the proposal would give suppliers ample time to build up their inventories. During a supply crunch, the release of these inventories would put downward pressure on prices in California. If anything, this additional supply would free up refinery capacity to serve Nevada and Arizona, also reducing prices in these markets.

A third critique is that the price spikes in California are the inevitable consequences of policy choices Californians have made about the environment. We Californians care about breathing clean air, we’re willing to pay a little more at the pump. But Californians did not sign up to pay more because of supplier market power, which is the root cause of the problem this proposal addresses.

Spikes in gasoline prices like that we experienced in September 2023 are far from inevitable. The Governor’s minimum inventory requirement will not address all of the issues in the California gasoline market in one fell swoop. But it is an economically sound policy that addresses an important problem in a well-targeted way. The California Legislature should pass it in the special session.

Neale Mahoney is professor of economics at Stanford and the incoming director of the Stanford Institute for Economic Policy Research. Ryan Cummings is an institute economist.