The Golden State’s “self-inflicted crisis”

When higher energy costs impact everyday lives, it can be a painful reminder that energy policies have real-world consequences.

California is facing just such a moment. Motorists in the Golden State recently paid record high prices for gasoline – prices that were more than 80 cents higher than the national average.

What’s behind this costly surge for consumers?

Some politicians want to blame the energy industry. But what happened last week was a series of unrelated incidents that, when combined with California’s policies that reduce the ability of the market to respond, aggravated an already difficult situation.

It’s important to keep in mind that California’s energy policies have effectively turned the state into a “fuel island” – disconnected from the rest of the U.S. market. California’s state-specific fuel standards and isolated logistics mean that gasoline and diesel can’t be easily brought in from other states when there is a supply shortfall. And a host of only-in-California regulations have raised costs, making it more difficult for refiners to invest in new technologies, and have even forced several refiners to shutter their facilities.

Obviously, it’s a situation that leaves California motorists extremely vulnerable to supply disruptions. The market simply can’t respond adequately within these constraints.

It’s the basic law of supply and demand. When supply goes down and/or demand goes up, there’s usually a corresponding increase in prices that reflects how much more everyone across the supply chain is willing to pay to ensure they have access to a product that has become more scarce.

A corresponding drop in price happens when the market receives signals that a product is plentiful, which is what we are currently seeing as a result of the increase in natural gas production in the United States.

One of several causes in last week’s supply disruption involved ExxonMobil, but we didn’t have the power to do anything about it – literally.

An incident at a Southern California Edison substation cut the power that the utility supplies to our refinery in Torrance. To ensure safety, we were forced to suspend refinery operations, which meant suspending production of gasoline and diesel that supplies some of the California market. It compounded a problem already created by a disruption at a Chevron refinery in the Bay area, and by other unrelated problems. The markets responded to the drop in supply by pushing prices upward.

A Wall Street Journal editorial on Monday described the mix of policy and regulatory choices California has made that have led to higher prices. These choices range from state-specific air-quality requirements to infrastructure impediments and some of the nation’s highest state-imposed gasoline taxes. The Journal is right to declare that “this crisis is self-inflicted.”

Not surprisingly, gasoline price spikes have led a number of California politicians to call for inquiries into alleged market manipulations by energy industry participants.

We agree California’s energy markets are being distorted – but what deserves investigation and public debate are the policies that have put California motorists in such a precarious position.

Of course, California is entitled to adopt the energy and environmental policies it deems best. But recent events are a reminder that government policy can have unintended effects on energy markets. Policies must be sound and market-oriented or the inevitable result will be that consumers suffer the consequences.