Newsom pushes through a bill that penalizes oil companies for “price-gouging.”

California lawmakers voted on Thursday to advance a bill that would penalize oil companies for “price gouging” — a first-of-its-kind legislation pushed forward in recent months by Gov. Gavin Newsom (D).

The SBX1-2 bill, sponsored by state Sen. Nancy Skinner (D), received the approval of the California State Senate in an Extraordinary Session convened to fast-track the legislation on Thursday morning.

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The bill could head to the State Assembly as early as Monday and receive the governor’s signature shortly after that, a source familiar with the matter told The Hill.

The bill would authorize the State Energy Resources Conservation and Development Commission to set a maximum gross gasoline refining margin — and then establish a penalty for any California-based refineries that exceed that margin. The Commission would be required, however, to consider a refiner’s request for an exemption from that maximum margin.

This is from Sharon Udasin, “Newsom gets big win: California Senate approves first-of-its kind ‘price gouging’ bill,” The Hill, March 23, 2023.

This has the whiff of price controls although it’s not literally price control. Or maybe you could say it’s price control with the penalty for violating the control spelled out explicitly: “establish a penalty for any California-based refineries that exceed that margin.”

It reminds me of Nixon’s price controls in 1971. The setting was very different. Nixon imposed a 90-day price freeze on August 15, 1971 and then relaxed the freeze but kept controls into 1974. But of course OPEC got powerful and raised the world price of oil from about $3 a barrel to $11 a barrel in a few months in late 1973. Nixon’s price controls didn’t allow refiners to pass along much of this increase. Thus the huge shortages and line-ups.

With Newsom’s plan, it’s hard to know how things will play out. It will probably be substantially less bad than Nixon’s controls because it sets “a maximum gross gasoline refining margin,” which means that any increase in the underlying price of crude oil will be allowed to be passed on.

One thing to be aware of, though, as I pointed out in January, is that the large margins don’t seem to be at the refiner level but at the individual gas station level. So if California’s government squeezes refiner margins, refiners would almost certainly respond by reducing output. If gasoline stations are free to raise prices then, ironically, Newsom’s controls will make gasoline prices higher than otherwise.

 

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