California Lawmakers Approve First-in-Nation Penalty on Oil Companies for Gas Price Gouging

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A sign at a gas station shows very high gas prices, approaching $6 a gallon. The Bay Bridge can be scene in the background.
The Bay Bridge rises behind the price board of a gas station in San Francisco on July 20, 2022. The California Assembly on Monday, March 27, 2023, approved a bill that would let the California Energy Commission decide whether to penalize oil companies for price gouging. The bill now heads to Gov. Gavin Newsom, who has said he will sign it into law. (Jeff Chiu/AP)

California lawmakers on Monday approved the nation's first penalty for price gouging at the pump, voting to give regulators the power to punish oil companies for profiting from the type of gas-price spikes that plagued the nation's most populous state last summer.

The Democrats in charge of the state Legislature worked quickly to pass the bill on Monday, just one week after it was introduced. It was an unusually fast process for a controversial issue, especially one opposed by the powerful oil industry, which has spent millions of dollars to stop it.

Gov. Gavin Newsom used his political power to pass the bill, which grew out of his call last December for a special legislative session to pass a new tax on oil company profits, following last summer's record-high gas prices — which reached an average of $6.44 a gallon.

Taking on the oil industry has been a major policy priority for Newsom, who is widely viewed as a future presidential candidate.

“When you take on Big Oil, they usually roll you — that’s exactly what they’ve been doing to consumers for years and years and years,” Newsom told reporters after the vote. “The Legislature had the courage, conviction and the backbone to stand up to Big Oil.”

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He is expected to sign the bill into law Tuesday.

Legislative leaders rejected his initial call for a new tax because they feared it could discourage supply and lead to higher gas prices.

Instead, Newsom and lawmakers agreed to let the California Energy Commission decide whether to penalize oil companies for price gouging. But the crux of the bill isn't the potential penalty. Instead, it's the reams of new information oil companies would be required to disclose to state regulators about their pricing.

The companies will now have to report this information, most of it to be kept confidential, to a new state agency empowered to monitor and investigate the petroleum market and subpoena oil company executives. The commission will then rely on the work of this agency, plus a panel of experts, to decide whether to impose a penalty on oil company profits and how much that penalty should be.

“If we force folks to turn over this information, I actually don't believe we'll ever need a penalty, because the fact that they have to tell us what’s going on will stop them from gouging our consumers," said Assemblymember Rebecca Bauer-Kahan, a Democrat from Orinda.

California's gas prices are always higher than the rest of the country because of the state's high taxes and relatively strict environmental regulations. California has the second-highest gas tax in the country, at $0.54 per gallon. And the state requires a special blend of gasoline that is better for the environment but more expensive to produce.

But state regulators say those taxes and fees aren't enough to explain last summer's spike, when the average cost of gasoline in California was more than $2.60 higher than the national average.

“There's truly no other explanation for these historically high prices other than greed,” said Assemblymember Pilar Schiavo, a Democrat from Chatsworth. “The problem is we don't have the information that we need to prove this, and we don't have the ability to penalize the kind of historic price gouging we saw last year.”

The oil industry recorded massive profits last year, following years of huge losses during the pandemic when more people stayed home and fewer drivers were on the road.

Eloy Garcia, a lobbyist for the Western States Petroleum Association, said California's high gas prices are the result of decades of public policy decisions that have made the state an island in the global petroleum market, and driven many local oil refiners away. He noted California does not have a pipeline to send oil into the state, meaning it has to ship what it can't produce itself from the ocean, which takes longer and costs more.

“We're not like Texas. We're not like Louisiana. We're not like the Northeast,” Garcia said. “We do not have a fungible fuel supply. We have chosen to do that. We have set ourself up by 30 years of public policy.”

Garcia said Monday's vote “sends a clear signal not to invest in California.”

But Lauren Sanchez, Newsom's senior climate adviser, said the state has plenty of supply, noting California oil refineries exported 12% of their product to other states last year.

“We're also the third-largest gasoline market in the world for these companies,” she said.