Why California's Gas Prices Are So High
Monday, April 16, 2012 - 11:50 AM
If you want know the price of gas around the United States, there’s a map online that breaks it down for you. The states with the cheapest gas are green, and the states with the most expensive are red. It’s probably the only map where California is one of the reddest states in the country.
People are blaming the threat of war in Iran and election year politics for the most recent hike in gas prices, but I wanted to know why Californians always seem to pay more.
I moved to California from Kansas about 15 years ago. The move made me realize what a big country we live in, and how different daily life can be from state to state. But we do have some things in common – whenever I talk to friends and family in other parts of the country, there are three things we can always talk about: the weather, how much it costs to buy a house, and the price of gas. It’s like a cultural barometer.
This past week I asked people around the country to record the price they paid for a gallon of regular gas. Here’s what people told me they paid.
Big Timber, Montana, $3.62
Lawrence, Kansas, $3.65
Golden, Colorado, $3.79
Nashville, Tennessee, $3.79
Minneapolis, Minnesota, $3.89. (Hot dogs, two for $2.50)
Boston, Massachusetts, $3.95
Brooklyn, New York, $4.19
But in California, we’re kind of jaded. San Francisco first hit the four-dollar mark back in 2008. Our gas prices, on average, are usually higher than in other parts of the country – we can pay as much as a dollar more per gallon than people just across the border in Oregon or Nevada. Last week, the a gallon of regular at one station in San Francisco’s Mission District went for $4.69.
Basically, gas prices rise when crude oil prices rise. Right now, crude oil is expensive. Severin Borenstein co-directs the Energy Institute at UC Berkeley. Borenstein says that no matter where you live, oil producers are the main driver of high gas prices.
“The reason we have four-dollar gasoline now and we had two-dollar gasoline a few years ago is the price of oil,” said Borenstein. “So if you're an oil producer, you're making a lot of money right now.”
According to the California Energy Commission, almost 70 percent of what you pay at the pump goes to oil producers. But what accounts for the regional differences in price? After all, we’re all paying the same amount for crude, and we’re all paying the same amount in federal gas tax. So why don’t we pay the same for a gallon of gas in California as they do in Kansas or Montana?
“California uses a different sort of gasoline than the rest of the country. It's a different formulation,” explained Borenstein. “It's a more expensive formulation to produce. It's also a cleaner-burning formulation.”
California has the strictest emission control regulations in the country, even stricter than the federal government. And our special gas recipe helps keep pollution down. But it also costs more to produce. On average it adds five to 15 cents to every gallon we buy. Lisa Margonelli, the author of the book, Oil on the Brain: Petroleum’s Long, Strange Trip to Your Tank, says one of the things we’re paying for in California is cleaner air.
“People say, ‘Oh my god, we're spending ten cents extra a gallon for gasoline! And we're just doing that to keep the air clean!’ Well, yes, you are. But your house is worth a lot more because you can see the nearby hills,” said Margonelli.
It wasn’t always like that. In the late 1960s and early 1970s, Margonelli says, air pollution was so bad in California that people could go for weeks without being able to see the mountains that ring Los Angeles.
“There were movies coming out of Hollywood about kids dying on the way home from school because of the smog,” she said. “California came up with this idea of changing the formula for the gasoline, changing the way the cars worked with catalytic converters and set off this whole chain reaction of events that basically allowed our population to keep growing, allowed our industry to keep growing. This is the bargain that we made.”
That bargain gives us cleaner air, but it also means that California is something of a closed market. Since our gas is an exclusive blend, refineries have to be specially designed in order to make it. And it’s a gas that no other state uses.
“You can't just get in a truck filled with gasoline from Oregon and drive here and flood our market with cheaper gasoline, bringing down the price and make a profit on the side,” said Margonelli. “You can't do that.”
So, if we’re running short on gas in California, we have to pay extra for limited supplies or pay extra to ship in our special formula from the few refineries that make it.
The other thing that happens is the gas recipe changes from winter to summer. Air quality tends to get worse as it gets hotter outside. But that summer gas is more expensive to produce. When refineries switch over it’s a complex process, and sometimes things go wrong -- which can limit supplies, or just make people really anxious about potentially limited supplies. This anxiety means that while the switch is happening, prices tend to go up. That’s going on right now.
A gas station owner in San Francisco named Joe has been in the business for the last 35 years. (Because his business depends on his good relationships with oil companies and refiners, he didn’t want to use his last name.) For him, higher gas prices don’t necessarily mean higher profits.
“Sometimes we make a few cents, sometimes we lose a few cents,” he said. “Whether the gas is one dollar a gallon or five dollars a gallon, our margin is basically the same thing.”
That margin is pretty small—Joe averages between five and ten cents profit for each gallon he sells. Most of the money station owners make comes from selling things like bags of Doritos and bottles of water.
“Most of the cost for the gas are taxes,” Joe explained. “Just on the gas alone there's approximately 50 cents in tax. So, if the gas is free, you'll pay 50 cents, let's put it this way.”
Right now in California we pay an average of 68 cents per gallon of gas in taxes. More than half of that goes to the state. Only consumers in New York State pay more – but by less than a penny. On top of the taxes, credit card fees also drive prices up.
On the street where Joe has his station, the price for a gallon of regular varies widely from station to station, by about ten or 11 cents. Some of that variation comes from whether or not the gas is generic or “brand name,” like Shell or Chevron. Severin Borenstein says some of that variation comes from how affluent the neighborhood is.
“If property values are high, gas stations don't tend to stay there, or fewer gas stations stay there. And if fewer gas stations stay there, there's less competition. So if the next gas station is right next door, you see more competition than if the next gas station's a mile away. As a result, in places where gas stations are more widely dispersed, you see higher retail margins. Now, these people aren't ripping you off, they have to cover their property cost. And that is part of what they're doing. They do charge what the market will bear,” said Borenstein.
So that’s one reason why, in a city like San Francisco, you can pay anywhere from $4.19 to $4.69 for the same gallon of gas. But, we also pay more for gas here simply because we can.
“In areas that are more affluent, I think we tend to see people be less aggressive in finding the cheapest gasoline,” said Borenstein. “As a result, in those areas, you do tend to see higher prices and higher retail margins. Again, retailers of gasoline are not generally getting rich off of that business. But it is the case that where they can charge a higher price, they will.”
Author Lisa Margonelli says California consumers are willing to pay more for gas not just because of affluence, but also out of necessity. Many of us simply can’t cut back.
“Your ability to cut back on gas really depends upon where you are in the economic food chain in the US, and in California in particular,” she said. “If you got a mortgage in 2005 say, and you decided that you really wanted to buy a house and prices were really high, you would have done something called drive ‘till you qualify. You would have driven away from the major city until you got further and further away to a place like Fairfield, maybe, where you would qualify for a mortgage, because housing prices were low enough, and mortgage terms were friendly enough to get you all the way out there. So then you're stuck in this house where you have to commute.”
As gas prices rise, and housing values go down, consumers are left in an economic vise with very few options for escape.
“So you're stuck with your car, you're stuck with your commute. And you hope that you can keep your job. You are stuck,” said Margonelli. “And at today's gas prices, the average family in California, a four-person household, is consuming about $436 worth of gasoline a month. That’s really high!”
That’s $125 more than an average family pays in neighboring Nevada. For many of us, gasoline is something we just can’t live without. If you don’t have access to public transit, or you live too far away from your job, you’ve got to drive. And that means you have to use California’s special, expensive blend of gasoline. But it’s not always the most expensive. You could live in Maui, Hawaii, for example, where a gallon of regular gas last week was $4.75.