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Attorney General Lockyer Releases Data Showing Fast-Rising Profit Margins for State's Gas Refiners

Urges Policymakers to Fix Structural Defects in California Market
Monday, September 8, 2003
Contact: (415) 703-5837

(SACRAMENTO) – Attorney General Bill Lockyer today unveiled data that show California oil refiners' price markup between the barrel and gas pump increased 152 percent from January 2003 to March 2003 – with virtually all of the rise representing profit – and in March 2003 outstripped the margin in the rest of the country by 127 percent.

"Californians have been afflicted with chronically exorbitant gas prices," said Lockyer. "These numbers raise legitimate questions about whether this state's drivers and businesses are getting gouged. But the data also show how important it is, for consumers' sake, that policymakers address the deep-seated market flaws that make California especially vulnerable to price spikes."

The data released today cover price run-ups experienced by Californians in the first three months of 2003, when the price of regular unleaded gas increased by 57 cents per gallon, from $1.58 to a then-record high $2.15.

The data update figures first presented in a May 2000 report issued by the Attorney General's Task Force on Gasoline Pricing. The report found no evidence of unlawful market conduct by oil companies. However, the report concluded the state's market suffered from several defects that place California in constant peril of price swings, particularly during supply disruptions. The task force suggested possible reforms to fix the structural deficiencies. To date, the flaws remain largely unaddressed. In calling for action, Lockyer urged policymakers to seriously reconsider the task force's ideas.

The price margins for California refiners and retailers – both before and after gas arrived at the pump – were significantly higher than in the rest of the country, according to the figures released today.

The new data show that in January 2003, the combined pre-pump margins in California for refining, marketing and reformulating added 27.6 cents to the price of a gallon of regular unleaded. By March 2003, that figure had risen by 42 cents, to 69.6 cents. That's a 152 percent increase over three months. The margins include costs and profit. But since refiners' costs increased minimally, if at all, between January and March, the increase is almost solely profit. In most cases, all pre-pump profits go to refiners. Pre-pump margins in California historically have risen in the first quarter, but not as sharply as they did this year, according to market analysts.

The comparison with the rest of the country is striking. In March 2003, the combined pre-pump margins outside California totaled 30.7 cents for a gallon of regular unleaded. That's 127 percent less than the 69.6 cents in California. These figures – which exclude higher taxes paid by refiners in California – cannot be fully explained by any difference in costs between California and the rest of the country.

The new data show the retail margin at the gas pump in California rose by 68.5 percent from January 2003 to March 2003, to 9.1 cents per gallon of regular unleaded. The California retail margin was 37.9 percent higher than in the rest of the country. All profit from pump sales goes to the retailer, which in many cases is the same company as the refiner.

The new data show that, while the size of the disparity has fluctuated, the pre-pump margins in California consistently have been much higher than in the rest of the country. In 1999, the difference was 123 percent, 43.5 cents per gallon of regular unleaded in California, compared to 19.5 cents nationally. In 2002, the margins totaled 34.1 cents in California and 19.1 cents nationally, a 78.5 percent difference. The higher difference of 127 percent in 2003 can be explained partly by California's forced switch to ethanol-based gas, which increased production costs by an estimated 6 cents per gallon.

Lockyer's office launched an investigation into gas pricing in late 1999. That investigation remains ongoing. While the probe has yet to find solid evidence of wrongdoing by oil companies or other market players, Lockyer noted the new data indicate the importance of continuing the effort. "These figures serve as a caution that in examining California's high prices, no possible cause should stand above suspicion," he said.

More certainty exists regarding longstanding structural problems in California's market, and how those flaws make California especially susceptible to price spikes. As the Attorney General's Task Force on Gas Pricing found in 2000, those market conditions include:

Lack of competition (the new data show seven companies control more than 95 percent of the state's refining capacity, and these refiners market most of their gas through their own retail networks); short-term supply problems (California refiners maintain relatively low inventory levels, which increases upward price pressure during supply disruptions); long-term supply problems (the state's geographic isolation from other refining centers, and the special gas reformulation required by its clean air rules, increase the difficulty and cost of importing gas).

Lockyer urged policymakers to adopt thoroughly studied, reasonable repairs of the state's gasoline market defects. "To maximize consumers' protections against price gouging, the state must address structural flaws, including lack of competition, that enhance the potential for market manipulation," he said.

In the mix of potential fixes, Lockyer said policymakers should consider the following suggestions offered by the Attorney General's task force: A strategic fuel reserve; measures to better enable retailers to seek the best price; eliminating agreements that inhibit competition; steps to more cheaply and quickly import refined gas, via pipelines or other means; and pursuing all reasonable means to increase fuel efficiency and use of non-gasoline based methods of powering vehicles.

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