Division of Petroleum Market Oversight Provides First Market Update

New regulator cited Russia’s invasion of Ukraine, refinery maintenance, and illiquidity in the spot market as the main culprits for the rise in prices.

The newly created Division of Petroleum Market Oversight (DPMO) within the California Energy Commission (CEC) issued its first market update in a letter to Governor Gavin Newsom and state legislative leaders in response to a recent increase in gasoline prices. The DPMO cited Russia’s invasion of Ukraine, refinery maintenance, and illiquidity in the spot market as the main culprits for the rise in prices. The letter did not mention any impact from California energy policies.

In March 2023, Newsom signed into law SBX1-2, which gave the CEC new powers to monitor the gasoline market and impose penalties on refiners who charge more than a maximum margin for refining gasoline. The regulatory was created as part of efforts to penalize “excessive” oil company profits in response to record high gasoline prices in California.

Interim Update

The letter, dated September 22, 2023, noted that gasoline prices have been steadily increasing in California since around August 1. The DPMO analysis is ongoing, but the department stated that it “appears” that the price spike is attributable to an increase in global crude oil prices; refinery maintenance “causing decreases in supply that refiners did not adequately prepare for by increasing inventories and imports,” and an “unusual spot market transaction that has had an outsized impact on gas prices.”

The DPMO said Russia’s invasion of Ukraine has caused global crude oil prices to climb and remain volatile for the past 18 months. “Because the price of crude oil is determined by a global market, the global increase is outside the control of market participants in California,” the DPMO wrote, “but those increases do not fully explain the increase in everyday prices that Californians pay at the pump or the increasing differential from national average prices.”

The DPMO also wrote that “it appears that earlier this summer refiners did not maintain adequate levels of inventory of refined gasoline and blendstocks or import additional supplies to sufficiently backfill production shortfalls or to protect against the impact of unplanned maintenance or potential spot market distortion.” It noted that, “[w]hen demand is high in the summer, undersupply can quickly lead to soaring prices at the pump.”

The DPMO also stated that an unusual transaction on the California spot market “caused the price of gasoline to increase by nearly $0.50 per gallon on the spot market, which ultimately gets passed on to consumers at the pump.”