Busting California’s Big Oil/Price Gouging Myth - Part 2

California’s onslaught of regulations targeting the state’s dwindling refining sector continues.? The most recent salvo was the California Air Resources Board (CARB) vote to drastically increase the state’s Low Carbon Fuel Standard (LCFS) carbon intensity reduction requirements.? The board approved the measure despite its own analysis indicating program revisions could increase consumer fuel costs from 36 cents to more than one dollar per gallon.? Previous posts noted the justification for trying to punish California refiners and force an overly aggressive shift to alternatives is rooted in the myth that consumer’s pump price woes are the result of “Big Oil price gouging.”? Part 1 in this series debunked the myth of “Big Oil.” A review of this year’s refining sector financial performance also reveals how claims of refiners “price gouging” for profit are equally false.

The Refiner “Price Gouging” for Profit Myth

The most recent stir over high gas prices started in 2022, when gas prices spiked as the state and country emerged from the pandemic.? While that was a profitable year for refining companies, financial analysts noted performance in regions outside of California, where consumer fuel prices were one to two dollars per gallon cheaper, drove industry profits.? California was the least profitable refining region during that time.

Over the past two years, refiner profits have been declining significantly, with most companies operating in the state experiencing losses in the third quarter.? The chart below highlights the percentage change in California refining company profitability from the second and third quarters of 2023 to 2024 respectively.? Since each company is different, with some operating in various parts of the oil and gas supply chain (e.g. Chevron is obviously a large upstream oil producer),?the chart focuses on U.S. refining earnings or net operating income only.

Earnings information shows the average decrease in refining profits from the second quarter of 2023 to Q2 2024 was 64 percent.? Refiners did profit in the second quarter, but the average profit margin was 2.7 percent, or just above break even.? For perspective, nationwide corporate wide average profit margins for the first two quarters of this year exceed 11 percent.

The third quarter of 2024 was bleaker.? The average profit margin for refiners operating in California is just below zero and the average profit decrease from Q3 2023 to Q3 2024 was 98%!? Morgan Stanley indicates the average U.S. corporate profit margin for the quarter was about 12 percent.??

These are nationwide profit figures for refining companies operating in California, but a focus on just the West Coast operations alone paints an uglier picture.? For example:

• Valero’s refining operating income company-wide was $568 million for Q3 2024, but it lost $99 million - or $4.38 per barrel of throughput - in California. During its earnings call, the company also inferred California refinery closures could be an option if the state’s business environment did not change.
• Company-wide, Marathon Petroleum managed to squeeze out a small 3 percent profit, but its refining and marketing margin in California was about 9 percent lower than the company as a whole, with California operating costs nearly 38 percent higher than the company's aggregate refining and marketing operating costs. Marathon also shut down a refinery in the Bay Area a few years ago and converted it to a much smaller renewable diesel plant that makes no gasoline.
• Phillips 66 took a $104 million impairment in its California refining segment during the quarter and, on the heels of the state passing a costly fuel inventory mandate, announced it would be closing its Los Angeles refinery in 2025.

Despite such a bleak financial environment in refining this year, with refiners operating in California on average losing money in the most recent quarter, the state's gasoline prices are still over $1.40 higher than the rest of the country.? Yet, the state’s politicians continue reciting their “Big oil price gouging” talking points as justification to keep advancing policies that put even more refining capacity at risk.

As with the myth of “Big Oil,” financial results and other publicly available data prove the allegation that the oil companies remaining in California are “price gouging” consumers to reap exponentially high profits is also a fallacy.? The state’s policymakers should stop lying to their constituents and start changing their approach to energy policy to ensure Californians have a secure, clean and affordable energy future.