Facing public skepticism from lawmakers over his push to penalize oil companies for excessive profits, California Gov. Gavin Newsom has dropped that proposal in favor of an alternative that would pursue a similar aim through regulations.
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The governor’s office said late Wednesday that it plans to put forward an amended bill in the coming days that would create a watchdog division within the California Energy Commission to investigate alleged price gouging by the oil industry and authorize the commission to set through its rule-making process a threshold above which profits would be penalized.
Dana Williamson, Newsom’s chief of staff, said the shift in approach was the result of months of consultation with legislators, who broadly felt that an appropriate penalty would best be determined by industry experts.
“We feel like this is stronger from where we started,” Williamson said. “It is the only one of its kind in the country. And it’s really going to set up a watchdog entity that is going to watch the industry every single day.”
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The amendments, for which language is not yet available, would establish requirements for oil refiners in California to regularly report information on factors that can contribute to massive price spikes like those the state saw last summer, such as maintenance schedules, inventory and import and export levels.
The watchdog division within the energy commission, which would have an independent director appointed by the governor, would be granted subpoena power as it conducts investigations and could refer suspected price gouging to the attorney general’s office for prosecution.
Greater access to this data that oil companies have historically withheld as proprietary would enable experts to more deeply consider what is the right threshold for a penalty on profits, according to the governor’s office, and inform a rule-making process through the California Energy Commission.
“What we’re asking for is simple: transparency and accountability to drive the oil industry out of the shadows,” Newsom said in a statement. “Now it’s time to choose whether to stand with California families or with Big Oil in our fight to make them play by the rules.”
This announcement takes the governor even further from the concept that he urgently laid out in October, when he called for a special legislative session to pass a tax on oil company profits, punishing the industry an “inexplicable” gap between gas prices in California and the national average that had grown to more than $2.50 a gallon. Prices, and the gap, have dropped since then, along with the political momentum.
The idea has also faced relentless criticism from the oil industry, Republican lawmakers and some economists. Even many of Newsom’s Democratic allies in the Legislature have been reluctant to embrace it, as during a hearing last month where several state senators expressed doubt that a financial penalty would have the desired effect of driving down prices.
The governor already abandoned his tax for the more politically palatable, and easier to pass, penalty. Now, even if lawmakers approve this revised measure — his office made clear Wednesday that the plan does not represent a deal with legislative leaders — it could be years before any new regulations are adopted, if the California Energy Commission pursues a rule at all.
Kevin Slagle, spokesperson for the Western States Petroleum Association, which represents the oil industry in California, criticized the new proposal for empowering unelected bureaucrats to increase energy costs and for potentially making confidential trade information public.
“At the end of the day, this proposal does not solve California’s gasoline supply problem and will likely lead to the very same unintended consequences legislators have reiterated to the Governor: less investment, less supply, and higher costs for Californians,” Slagle said in a statement. “This is simply just another tax wrapped in unchecked and expensive bureaucracy.”
Republican leaders in both the Senate and Assembly immediately labeled the plan a tax increase, highlighting a major messaging obstacle for Newsom as he tries to shepherd the bill through a dubious Legislature.
“As Governor Newsom attempts to hide his efforts behind clever words, Californians will see this for what it really is — a gas tax increase amid record-high inflation and an economic downturn,” Senate Republican Leader Brian Jones of Santee said in a statement.
'The Independent' reports that energy companies raked in over $200 billion in 2022 amid sky-high oil and gas prices.
As Americans faced high gas prices, big oil companies doubled their profits
As Americans felt the crunch of a tighter global oil supply both at home and at the pump, major oil companies set new profit records.
The top five oil companies based in the West set new earning records in 2022, all at least doubling their 2021 profits to achieve combined earnings of nearly $200 billion. ExxonMobil reported the highest profits of any single company at almost $56 billion. These earnings come in the wake of Russia's invasion of Ukraine. The war has impacted the price of various commodities, especially oil, and strained an already rising inflation rate.
Americans saw gas prices reach their peak in mid-June with a national average of $5 per gallon according to the American Automobile Association. It would take another two months before prices fell below $4 a gallon. The decision to prioritize shareholder interests has drawn criticism from both the Biden administration and other Democrats.
"They invested too little of that profit to increase domestic production and keep gas prices down," President Biden said during the State of the Union address on Feb. 7. "Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders."
Annual reports show profits outpaced production growth
Profits during both 2021 and 2022 came after losses in 2020 tied to the pandemic. When the lockdowns, social restrictions, and trend toward remote work drastically shifted people's transportation habits, oil traders were at times paying buyers to take barrels from them.
Historically, times of low oil supply and subsequent surging prices have led companies to increase drilling and restock the market. These sudden shifts in supply have also led to crashes in oil prices, as exemplified by the energy crises of the 1970s, which later culminated in the 1980s oil glut and a sustained collapse in oil demand that lasted nearly a decade. Concurrently, vehicles with better fuel economy entered the market and newly discovered oil fields meant demand didn't keep up with production increases.
Oil companies have been careful not to recreate the boom and bust pattern, the lesson of 40 years ago remaining fresh in corporate consciousness, and that means they were slower to increase production even as gasoline prices surged to new heights. While 2022 profits more than doubled for most companies, the increase in year-over-year production grew at a much slower pace.
Exxon reported a 2.8% increase in global production of crude oil and other liquids, equal to 65,000 barrels per day. Chevron's year-end reports show global oil production stayed about even with last year, while BP said it reached its lowest production costs since 2006.
The Biden administration released barrels from the nation's strategic oil reserve throughout 2022 to temper demand as well, the continuation of a policy that had been set in 2021 to curb inflation. The pressure from Biden to increase oil production seemed to come in contrast with the administration's climate goals. Environmental groups say production boosts offer only short-term relief but keep Americans dependent on a commodity that too often wavers in price and is largely controlled by a few major companies.
"More U.S. drilling isn't going to help solve the problem or lower prices. It will just deepen our dependence on expensive fossil fuels while destroying our climate, harming our health, and polluting communities," John Noël, senior climate campaigner at Greenpeace USA, said in a statement last fall.
After pandemic losses, oil companies felt shareholder pressure to diversify their energy portfolios. Even Exxon, historically resistant to transitioning from oil and gas, made investments in the hydrogen and carbon capture space; however, record profits this year mean Big Oil has little incentive to increase its decidedly limited spending on clean energy. BP, which has struggled to climb out from under a significant debt load, is even backtracking on its carbon goals. After planning to cut emissions 30-35% by 2030, BP now says it will increase oil and gas production in 2023. In the immediate aftermath of the announcement, the company's stock price hit a near 4-year high.
