Newsom Wants to Penalize Oil Companies for Excessive Profits. But Would It Help or Hurt Consumers?

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Gas prices over $6.00 a gallon are displayed at a Chevron gas station on Sept. 27, 2022 in San Rafael. Gov. Gavin Newsom has proposed a windfall profits tax on oil companies, which state lawmakers are will consider in a special legislative session starting Dec. 5. (Justin Sullivan/Getty Images)

The new class of California lawmakers being sworn in today is being asked to tackle a problem stymieing the world: how to rein in the price of gasoline, which soared to record highs here this fall.

But there’s little agreement on how — or whether — policymakers can actually drive down the cost of fuel. Many experts are skeptical of Gov. Gavin Newsom’s plan to do so by imposing a windfall penalty on oil profits.

Newsom first called for a windfall profit tax in September, as gas prices spiked and oil company profits also soared. Last week, he officially called a special session of the Legislature, asking lawmakers to return to work before their January session and consider what he’s now calling a profit penalty, not a tax. He also wants lawmakers to help craft legislation to give state regulators more power to review and evaluate oil company profits and pricing, along with more oversight of the refinery process.

Gov. Gavin Newsom in a suit and tie speaks into a microphone
Gov. Newsom, seen here in the gubernatorial debate at KQED headquarters in San Francisco, has said the proposal will help bring down gas prices. (Justin Sullivan/Getty Images)

Those proposals, he says, will ease pain at the pump for consumers.

“They're ripping you off. They're ripping every one of us off,” Newsom said at KQED’s gubernatorial debate in late October. “And we're going after these companies and we're getting serious about the stress and pain Californians are facing.”

'Oil money has become toxic'

Oil companies saw the writing on the wall long before the governor’s call for action. They pumped more than $8 million into legislative races this cycle, in an apparent effort to elect more oil-friendly lawmakers. Much of that money was used not to back traditionally sympathetic Republicans, but to prop up Democrats they see as more moderate and more open to industry concerns than their progressive Democratic opponents.

Doug Morrow, who does opposition research on behalf of progressive Democrats, said he’s seen oil companies become more and more active in Democratic politics since the state passed its first landmark climate change law in 2006.

“As California's become a bluer and bluer state and there are more and more Dem-versus-Dem general races, the business community … and specifically the oil industry, has focused more and more on electing moderate Democrats to the Democratic majority,” he said, noting that in many California districts, Republicans simply cannot win.

“Those seats are no longer in their game plan. So they go into Dem-versus-Dem seats and try to find the most moderate candidate to represent or protect their interests as possible,” Morrow said.

a gas station with a man pumping gas and gas prices are all over $6 per gallon
A gas station in Los Angeles shows the high price of gas in November 2022. ExxonMobil Corp. posted a quarterly profit of nearly $20 billion, the highest quarterly profit in company history amid a surge in oil prices during the quarter. (Mario Tama/Getty Images)

But Big Oil isn’t giving that money directly to candidates, as many within the Democratic Party have pledged not to take fossil fuel donations; instead, the industry, through political action committees, pumps millions of dollars into TV ads, mailers and other campaign expenses. Those are considered independent expenditures, and PACs are legally prohibited from coordinating with a candidate’s campaign.

Whether their multi-million dollar bet will pay off remains to be seen. Take the biggest spender this cycle: “The Coalition to Restore California's Middle Class, Including Energy Companies Who Produce Gas, Oil, Jobs and Pay Taxes.”

Funded by Valero, Chevron, Marathon Petroleum and Phillips 66, that PAC directly spent $5 million in eight races this fall, and lost in just two of them — not a bad record.

But even when a PAC's candidates win, there's no guarantee they will do oil’s bidding in Sacramento. Take the costliest race of this cycle — a Senate contest in Sacramento between two Democrats, where the Coalition poured $1.6 million into backing Angelique Ashby, who ultimately won.

Ashby, however, signed the "no fossil fuel" pledge, denounced the spending on her behalf, and promised to work with Newsom on his windfall profit proposal.

Mike Young is political and organizing director at California Environmental Voters, which supported Ashby’s Democratic opponent, Dave Jones. Young said that Ashby’s comments show the politics have shifted in California.

“[Oil] money has become toxic, as it should be,” he said. “And even their candidates are trying to be very careful about what they say or what they do and how connected they are to it.”

Young believes that oil companies are coming into the windfall debate and new legislative session back on their heels, given the new class of lawmakers that remains solidly Democratic. His group endorsed 13 legislative candidates and lost just three of those races.

Oil companies did not respond to repeated requests for comment about their campaign spending — but at a California Energy Commission hearing last week examining high gas prices, Western States Petroleum Association CEO Catherine Reheis-Boyd acknowledged the enormous power the Legislature and other state leaders have over the industry.

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“Through public policy, the governor, the legislators, the regulatory agencies, have the most opportunity to make changes that can positively impact Californians,” she said, going on to argue that the state’s strict regulatory environment and ambitious climate change goals are the reason for soaring gas prices — not profit gouging by oil companies.

“The facts are, policy decisions [that] have been made and [that] continue to be made have a direct impact on the cost of fuel for California families and businesses,” she said.

Reheis-Boyd warned that Newsom’s proposed windfall tax, or penalty on oil companies, would only worsen those costs: “You cannot tax your way out of this problem. The only result of a windfall profits tax will [be to] make the problem worse.”

Concerns about gouging

It’s not only the oil industry throwing shade at Newsom’s idea. While many politicians are rallying behind Newsom’s proposed reprimand of oil companies, economists are dubious that a windfall penalty will actually reduce the price of gas at the pump.

California’s gas prices are currently about $1.50 per gallon higher than the national average, according to AAA. That cost difference is due to the state’s relatively high gas tax, environmental fees, and a special fuel blend that the state has used for decades to reduce air pollution. That means when refineries are down for maintenance, as some have been in recent months, it’s challenging to import gas that meets state standards. So when supply is squeezed, prices jump faster and farther here.

California also lacks pipelines to import fuel due to environmental regulations, and the vast majority of the state’s gasoline is produced by just five companies: Chevron, Marathon, PBF Energy, Phillips 66 and Valero.

But politicians are concerned that more is at play, and that these companies are gouging their fuel prices as they report record profits.

Whether that’s true or not, many economists say a windfall penalty is not the way to rein in what drivers pay for fuel.

Addressing members of the CEC, UC Berkeley energy economist Severin Borenstein said “the windfall profit tax would not lower gas prices. It would simply claw back some of the profits from those high prices.”

Erich Muehlegger, professor of economics at University of California, Davis, says windfall profit taxes fail to address the underlying drivers of high gas prices.

“In fact, a windfall profit tax might actually make it more likely in the future to see similar events like what triggered the windfall profit tax in the first place,” Muehlegger said in an interview.

oil pumps in a field
Oil wells are seen at an oil facility by Highway 5 near Bakersfield. (Tayfun Coskun/Anadolu Agency via Getty Images)

The argument goes that a windfall tax will reduce incentives for the industry to invest in capacity, further strangling supply and making gas more expensive.

The U.S. had a federal windfall tax in the 1980s, and studies showed that it reduced oil production nationally, and led the U.S. to import more oil.

Should the state pass a windfall tax, it’s unclear how it would work. The government would have to define what an "excessive" profit may be and decide how to distribute the money collected through the tax, as well as who should receive those funds.

A mixed bag for the climate

Newsom and other elected officials are trying to rein in high gas prices while at the same time attempting to wean Californians off fossil fuels. And the impact any windfall tax may have on the environment is a mixed bag.

A short-lived tax would have little impact on emissions, Muehlegger says.

A permanent tax, in the short-term, could increase emissions, leading to less refining within the state, and the use of more fossil fuels to transport imported oil. Over the long-term, emissions could decrease as higher gas prices may encourage less driving or higher adoption of alternatives like public transit, electric vehicles or e-bikes.

Paasha Mahdavi, associate professor of political science at the University of California, Santa Barbara, agrees passing a windfall tax is not the best way to reduce emissions or win politically.

“You bear a huge political cost for doing so because you've raised the price of something that is very, very visible to everybody,” Mahdavi said. “And you've angered a very broad constituency.”

The way to deal with high gas prices and emissions, he said, is to incentivize people to use clean energy sources. “We want policies that last, that create winners, not policies that anger losers.”

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