California investigates: Are gas prices being manipulated?

You can’t turn on a TV or radio in California these days without hearing the oil companies and their industry associations complaining that the state can’t afford to move to cleaner fuels.

Their prediction: Cutting pollution from the transportation sector will drive up gasoline prices at a time when consumers can least afford it.   

What the oil industry’s $56-million political campaign and even wider-reaching ad campaign don’t say is that if gas prices do go up this year, it will likely be the oil industry—not clean energy—that’s to blame.

A price game called rockets and feathers

Since 2005, the price of gas in California has fluctuated by an average of $1.16 per gallon, while diesel has fluctuated by $1.01. Year after year, prices at the pump shoot up – yielding significant additional profits for fuel suppliers – then casually drift down back to a point higher than where they started.

The phenomenon is so well known that industry insiders call it rockets and feathers – and it extends beyond California. Prices jump up and down in most states.

The oil companies say they don’t cause these fluctuations, but the problem is so severe that California Gov. Jerry Brown and the state legislature just gave the California Energy Commission $330,000 to investigate and prevent gas price fixing and market manipulation by the industry.

It makes California the first state in the nation to provide dedicated resources to look into gasoline price swings in an effort to protect its consumers.

So where exactly lies the problem?

Market domination can lead to price manipulation

Transportation fuel is a concentrated market where a handful of suppliers control a product everyone has to have.  Small and large businesses, commuters, soccer moms, motorcycle clubs – pretty much everyone – needs the gas and diesel supplied in California by just 22 companies.

Six of these companies – Chevron, Tesoro, BP, Phillips 66, Valero and Shell – control 90 percent of the total supply. And since the early 2000’s, government officials have recognized that this concentrated, opaque market is a problem.

Growing concern

A decade ago, California’s then-Attorney General Bill Lockyer called on policymakers to “begin taking the steps necessary to increase competitiveness, supplies and fuel conservation…and to reduce California’s petroleum dependence through increased fuel economy and non-gasoline based technology.”

Eight years later, U.S. senators from California, Washington and Oregon sent a letter to U.S. Attorney General Eric Holder requesting an investigation into oil company market manipulation and price fixing.

Citing analysis produced by McCullough Research, the lawmakers observed that refinery shutdown reports were inconsistent with production data. McCullough found that price increases generated an estimated $25 million per day in windfall profits for the oil companies.

Today, California is taking action, and you can be sure industry and policymakers in other states are watching to see what happens next.

The answer: Cleaner and more diverse fuels

California still has the worst air quality in the nation, and spends over $30 billion per year on gas and diesel from imported oil. No wonder more than 70 percent of Californians support the state’s clean fuel policies.

Yet the oil companies, led by Chevron, Tesoro and Valero are doing everything they can to kill measures under the state’s Global Warming Solutions Act of 2006 – common-sense solutions that clean up the air and accelerate home-grown alternative fuels that break the state’s dependence on gasoline and diesel.

This year, Environmental Defense Fund teamed up with nation-leading economists who focus on fuel market dynamics to describe some of the benefits of California fuel policies. We found, among other things, that price volatilities would likely be reduced in the long-run if the state’s fuel mix became more diverse.

As California implements its new state budget, hires new experts and uses it’s law enforcement tools to look into the true causes of market fluctuations, the benefits of California clean fuel policies will become even more clear.

Maybe then, the oil industry’s blame game may be shut down, once and for all.

Best of all, the popular new policies that will lead California to cleaner, cheaper fuel will be strengthened and preserved – while helping to steer the rest of the nation in the right direction.

 This blog post was adapted from an original text published on EDF’s California Dream 2.0 blog.