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California Lawmakers OK Potential Fines for High Gas Prices | May 2023

May 2023 | Volume 14, Issue 10

Read the full article from ABC News.

According to the article, California lawmakers recently 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 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 that has spent millions of dollars to stop it.

Democratic Governor Gavin Newsom used his political muscle to pass the bill, which grew out of his call last October for a special legislative session to pass a new tax on oil company profits after the average price of gas in California hit a record high of $6.44 per gallon, according to the American Automobile Association. 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.”

Legislative leaders rejected his initial call for a new tax because they feared it could discourage supply and lead to higher 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 is not a potential penalty. Instead, it is the reams of new information oil companies would be required to disclose to state regulators about their pricing.

The companies would 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 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 taxes and regulations. California has the second-highest gas tax in the country at 54 cents per gallon. And it 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, when the average cost of a gallon 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 people were on the road.

Eloy Garcia, 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 oil refiners out of the state. He noted California does not have a pipeline to send oil into the state, meaning it must ship what it cannot 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 ourselves up by 30 years of public policy.”

Garcia said the recent vote “sends a clear signal not to invest in California.”

Lauren Sanchez, senior climate advisor for Gov. Gavin Newsom, said the state has plenty of supply, noting California oil refineries exported 12 percent of their product to other states last year.

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

Discussion Questions

  1. Define price gouging.
    Price gouging is generally defined as the act of charging customers an excessively high price for goods or services, especially when demand is high, and supplies are limited. Note that an “excessively high” price is not particularly defined (could it even possibly be?), so whether a particular transaction or series of transactions constitutes price gouging will depend on the unique facts and circumstances of a particular case.
  2. Explain whether price gouging is consistent with or contrary to the principles of a free market system (where the interaction of supply and demand determines the price that will be charged for a particular product.)
    This is admittedly a difficult question to answer. One of the basic notions of a free market is that the interaction of supply and demand should determine the price for a particular product. Fundamental economics would indicate that if the supply of a product is low and the demand for it is high, that would (and should) serve to increase the price for the product.

    Perhaps laws against price gouging should be considered as an exception to the principles of free market capitalism, and that beyond a certain point, sellers should not be allowed to charge the price that the free market would otherwise dictate. For example, in the immediate aftermath of a hurricane, should a convenience store be allowed to charge $100 for a flashlight that would otherwise cost $10, or $20 for a bag of ice that would otherwise cost $2? Price gouging laws are based on fundamentals notions of ethics and equity. There is a strong consumer preference associated with such laws.
  3. In your reasoned opinion, will the subject law successfully eliminate gasoline price gouging in California? Why or why not?
    This is an opinion question, so student responses may vary. In your author’s opinion, although the new law in California might serve to reduce the number of instances of price gouging, it will not eliminate it entirely. Your author’s opinion is based on the realization that before a price gouging case is successfully (i.e., in favor of the consumer) resolved, the consumer must first bring legal attention to the case by filing a complaint with the appropriate legal authority, presenting evidence that (in the opinion of the consumer) demonstrates price gouging, and then receiving a remedy from the legal authority. The other alternative would be for the state’s attorney general (or other state authority with legal standing) to initiate the action, but that again would likely require consumer initiative to make the state government aware of the problem.

    One final problem—Enforcing regulations like price-gouging laws are much akin to playing the state fair game of “Whac-a-Mole”—Even if a particular violator is successfully “brought to justice,” four or five other violators may “pop up” in their stead!