When California decides to wage war on Big Oil, Californians aren’t the only ones who end up paying the price.
Because Nevada imports nearly 90 percent of our transportation fuels from our western neighbor, many of the California-specific reasons for higher prices bleed over to our side of the state line. And, unfortunately, things are only about to get worse with Gov. Gavin Newsom pushing forward a plan to cap profits within the industry.
The California Energy Commission will soon set a maximum refinery profit margin in an attempt to “reduce price spikes and stabilize the gasoline fuel supply market.” However, many have expressed concern that the move could result in further limiting the state’s already limited supply of refined gasoline — a result that would, ironically, push prices even higher for consumers throughout the American West.
Last week, Nevada Gov. Joe Lombardo sent a letter to Newsom outlining the possibility of such unintended consequences and requesting stakeholders throughout the region be consulted before any final profit cap is implemented.
“Before proceeding … I would request an assessment of potential impacts of this approach across the West,” Lombardo wrote in his letter. “To assist with this, my Office of Energy stands ready to immediately engage in proactive conversations with the California Energy Commission.”
Apparently, however, Newsom isn’t as interested in considering the potential downstream consequences of his policy priorities as he is in taking a few political jabs at a relatively popular Republican governor.
“This is a stunt to appease Governor Lombardo’s Big Oil donors, who contributed tens of thousands of dollars to his campaign,” Newsom spokesperson Alex Stack told Politico.
The statement from Newsom’s office is in line with other talking points he has used to attack those who are concerned about the economic realities of cracking down on the oil and gas industry. Stack also took the opportunity to, once again, portray high gas prices in both states as nothing more than the result of corporate greed.
“Oil refiners are driving up gas prices and making massive profits — harming residents of both of our states,” Stack said. “Price spikes are profit spikes, and California is holding Big Oil accountable.”
It’s not the first time Newsom’s administration has described high prices as little more than “illegal price gouging by greedy oil companies.” And while such rhetoric makes for a nice political talking point, merely painting oil companies as “greedy” isn’t exactly a robust economic analysis of what’s going on with fuel prices here or in the rest of the country.
After all, are we supposed to believe that oil and gas companies are simply greedier in California than the rest of the nation? Does that mean they are altruistic and charitable in states such as Mississippi and Arkansas where prices are well below the national average?
The truth is a company’s desire for profit isn’t the only economic factor contributing to the cost of gasoline at the pumps. Everything from distribution costs to the burden of regulatory compliance plays a part in determining what we pay when we fill up our vehicles — and California, as it turns out, has created an environment where higher-than-average prices are practically guaranteed.
For starters, the state’s existing regulatory requirements for refining oil has created an “isolated market” where virtually every drop of gasoline sold in the state must be processed at one of the state’s limited number of refineries. This requirement alone causes economic pressures not seen in other corners of the nation where gasoline can move more freely between borders and meet demand spikes when needed.
Adding to potential supply constraints, governmental factors — such as fuel taxes that are among the highest in the country — drive the price even higher by increasing the costs and destabilizing supply.
And while “profits” might be a dirty word in some political circles, profits are nonetheless what incentivizes companies to actually meet the demands of consumers. One doesn’t have to be an apologist for the oil and gas industry to recognize that limiting those incentives could adversely impact how willing companies are to keep refining oil within California’s already expensive and hostile regulatory environment. In fact, even some of the California lawmakers who initially authorized capping profits have expressed worry that it could end up driving fuel prices higher
And such concerns are well founded. Limiting profits is essentially a form of price control, and economists across the political spectrum understand how damaging price controls can be for consumers in the real world.
In the 1970s, for example, President Richard Nixon toyed around with price controls as a way to combat high inflation. Rather than providing Americans with financial relief, however, the controls destroyed incentives for companies to provide consumers with the goods they needed. Certain goods had to be rationed, supply chains were disrupted and many farmers even began drowning their chickens and killing off livestock as a result of price ceilings being set too low.
Thankfully, Nixon’s widespread price controls were short-lived — but the idea of applying such policies to fuel remained popular among policymakers. When the Middle East withheld oil shipments to the United States on political grounds, prices skyrocketed and, yet again, officials responded to inflating prices by enacting strict limits on what private companies could charge.
Yet again the results were devastating for consumers — resulting in massive shortages and notoriously long lines at local gas stations.
Given that California’s public policies don’t only impact California’s consumers, Gov. Newsom’s plan to emulate Nixon- and Carter-era economic policies doesn’t bode well for Nevadans. At the very least, Newsom has an obligation to take the concerns of regional stakeholders seriously rather than politically lash out at critics by labeling them shills for Big Oil.
After all, that sort of performative political attack might play well with his supporters in California, but it’s not going to do anything to help consumers at the pump — regardless of which state you happen to be in.
Michael Schaus is a communications and branding expert based in Las Vegas, Nevada, and founder of Schaus Creative LLC — an agency dedicated to helping organizations, businesses and activists tell their story and motivate change. He has more than a decade of experience in public affairs commentary, having worked as a news director, columnist, political humorist, and most recently as the director of communications for a public policy think tank. Follow him at SchausCreative.com or on Twitter at @schausmichael.
