DPMO Recommends Gasoline Market Transparency and Minimum Inventories
California’s gasoline market monitor provided near-term policy options “to address spot market dysfunction and the recurring supply conditions that lead to price spikes.” Tai Milder, the director of the Division of Petroleum Market Oversight (DPMO), shared the results of his months-long investigation in a letter to Governor Gavin Newsom, recommending increased transparency in the California gasoline spot market and a minimum inventory requirement for oil refiners.
In March 2023, Newsom signed into law SBX1-2, which gave the California Energy Commission (CEC) new powers to monitor the gasoline market and impose penalties on refiners who charge more than a maximum margin for refining gasoline. The legislation created the DPMO within the California Energy Commission (CEC) to provide guidance and recommendations to the governor and the CEC on issues related to transportation fuels pricing and “transportation decarbonization.” The DPMO issued its first market update in September.
Gasoline Price Spikes
In his January 31, 2024 letter, Milder stated that price spikes appear to be occurring more frequently than in the past with price spikes “occurring in three of the last five years, with the exceptions being during the COVID pandemic.” The price spikes “have been generally driven by periodic episodes of undersupply of gasoline (in the form of reduced refinery production, lower inventories of stored gasoline, or both) that are exacerbated — and sometimes exploited — by the dynamics of trading and reporting on the spot market.” Milder concluded that volatility, illiquidity, and lack of transparency “may all be contributing to and exacerbating” these price spikes.
The DPMO is focusing on near-term measures to reduce volatility, increase liquidity, and provide improved transparency on the spot market “while helping avoid supply conditions that appear to lead to price spikes.” These options are (1) publishing a California spot market report and (2) establishing minimum inventory and resupply obligations on refiners.
Publishing a California spot market price report: SB X1-2 requires traders and related parties to report their spot market transactions to the CEC each day. The DPMO is considering using this information to publish the daily spot market trading information to “create a more complete and accurate report of spot market activity.”
Imposing minimum inventory and resupply requirements for refiners: The DPMO is considering minimum inventory and resupply requirements for refiners to “have a stronger buffer to protect against price spikes during circumstances when refineries are undergoing maintenance or when supplies are otherwise constrained.” SB X1-2 requires refiners to report critical supply information during both planned and unplanned maintenance events, and the DPMO has reported that refiners did not maintain adequate inventory of refined gasoline during the recent price spike.
The letter noted that these potential solutions require further study and “additional technical capacity at DPMO and the CEC.” The agency is analyzing other policy options, including whether to recommend an oil profits penalty as authorized in SBX1-2.
The California Energy Transition is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.