Even with historically low gas prices due to the coronavirus pandemic and a glut on the oil market, Californians pay on average a dollar more per gallon than the rest of the nation.
(CN) — The state of California accused two oil and gas companies of working together to keep gas prices artificially high for the state’s consumers in a lawsuit filed Monday.
California Attorney General Xavier Becerra said gasoline companies SK Energy Americas and Vitol engaged in a scheme that used the explosion at the oil refinery in the Southern California city of Torrance to manipulate gas prices at the pump via a convoluted series of concealed trades on futures markets.
“Today I’m taking two multinational gas companies to court to prove they manipulated gas prices to illegally enrich themselves at the cost of California consumers,” Becerra said during a teleconference Monday morning.
The case dates back to 2015, when the Torrance refinery sustained extensive damage after an explosion there, causing significant disruption in the gasoline market in California. The refinery in question was responsible for roughly 10% of the state’s gasoline supply, which decreased dramatically, driving up prices at the pump.
But Becerra said Vitol and SK executed a series of trades, some of which they hid from the Oil Price Information Service in order to drive up the price of gasoline and enrich their respective bottom lines at a significant cost to California consumers.
The companies used traders who were friends with each other to collude in driving up the price by making certain transactions appear materially different to confuse others about the true nature of supply in demand in the market at a given time.
The two firms engaged in making trades with each other that caused spikes in the market. Some estimates indicate the scheme could have cost state residents as much as $150 million in 2015 alone, with the scheme likely persisting into late 2016.
“High prices at the pump in California are not a result of excessive regulation and taxation but are a result of greed and market manipulation by the oil and gas industry,” said Assemblyman Marc Levine, who joined Becerra on the teleconference Monday.
Levine said he has been investigating why Californians pay so much more at the gas pump than residents in the rest of the country. While pundits typically point to environmental regulations, high gas taxes and other government initiatives as the main reason Californians pay more, Levine says Californians have long paid a hidden surcharge that describes a gap between what the market dictates and what consumers actually pay.
Before the coronavirus pandemic, Californians paid about $4.50 more than an average American to fill up a 15-gallon tank according to a California Energy Commission report issued last October. Even now, as oil companies reel from an oversupply problem that drove the price of a barrel of crude oil into negative territory last week, California’s average price for a gallon of gas is $2.70 — nearly a dollar higher than the national average of $1.80, according to the U.S. Energy Information Administration.
Some of that 90-cent price difference can be chalked up to higher costs associated with regulatory compliance and gasoline taxes of various sorts, but a full quarter of it is unexplained — leading some experts to call it the Mystery Gasoline Surcharge.
Levine and other lawmakers began asking about the hidden surcharge in the summer of 2019 after gasoline prices escalated above $4 a gallon.
Severin Borenstein, an economist with the University of California, Berkeley, pioneered the concept of the hidden surcharge and captured the attention of lawmakers and ultimately Governor Gavin Newsom.
Some of the price inflation in the Golden State is due to retailers simply charging more than other places, but there are nefarious business practices at work too, Becerra said Monday.
“The plot is thicker than it seems,” the attorney general said. “There are many ways people with unscrupulous intentions can figure out to manipulate the price of gas.”
This past October, California Governor Gavin Newsom charged Becerra with figuring out precisely how those with unscrupulous intentions were ripping off consumers as he called for investigations into the higher prices.
Becerra said Monday’s lawsuit was merely an opening salvo in a comprehensive and continuing investigation into gas prices in California.
“We are going to go after price gougers when it comes to gasoline,” Becerra said.
The stakes are high.
“Compared to the status quo prior to February 2015, the MGS [Mystery Gas Surcharge] has cost California consumers about $20 billion, and payments continue to flow at a rate of about $4 billion per year,” Borenstein said in a blog post last year.
Vitol denied the allegations and vowed to fight the lawsuit.
“Following the 2015 explosion at Exxon’s Torrance, California refinery — which reduced gasoline production in California — Vitol aided the California markets by importing gasoline into the state, supplying refiners and other companies at competitive market prices, and managing risk using routine commercial practices,” the company said in a statement. “Vitol’s actions were consistent with customary market practice and fully compliant with all applicable laws.”
Vitol says it “engaged transparently” with Becerra’s office throughout the investigation and is “disappointed that this lawsuit was filed.”
An email to SK seeking comment was not returned by press time.