California lawmakers question Newsom oil profit penalty, fear ‘unintended consequences’

California Gov. Gavin Newsom may face a tough road persuading lawmakers to support his oil windfall profits penalty, as Democrats and energy experts expressed uncertainty Wednesday about the right strategy to address high gas prices.

The Senate Energy, Utilities and Communications Committee held the first public discussion of Newsom’s plan to penalize oil companies for earning profits over a certain cap and return the funds to Californians. But there was no consensus around the idea.

Sen. Dave Min, D-Irvine, said it’s clear people believe “oil companies were profiting off the backs of Californians.”

“At the same time, we don’t really have a smoking gun, as far as I can see, that shows intentional collusion,” Min said. “And the oil companies have come over and claimed to us that this proposal might be counterproductive.”

The hearing was the first of a special session the governor called to address the state’s high gas prices, which surged last summer and fall and prompted scrutiny of oil industry profits. The committee heard from three different panels: state administrators who presented Newsom’s plan, energy experts and oil and consumer stakeholders.

But the hearing provided few additional details on the governor’s proposal, which Sen. Nancy Skinner, D-Berkeley, is carrying as Senate Bill X1-2. Representatives from the California Energy Commission and the California Department of Tax and Fee Administration, who presented Newsom’s plan, still didn’t have information about how the governor proposes to set a cap on oil company profits or who would be eligible to receive refunds.

Siva Gunda of the CEC and Nicolas Maduros of the Tax and Fee Administration emphasized the plan is meant to deter windfall profits, not prevent oil companies from earning “very healthy profits.” There have been only three price spikes during the past decade — surges in 2015, 2019 and 2022 — when a penalty may have applied, Gunda and Maduros said.

“The governor’s proposal attempts to create the missing incentive to resist the opportunity to collect spiked margins whenever they can,” Gunda said.

Experts weigh in on oil policy

Experts and lawmakers agreed they need more information on the oil industry’s supply and pricing dynamics to better understand California’s uniquely high gasoline prices. But they disagreed on whether a profit penalty would improve prices for drivers.

Ross Brown of the Legislative Analyst’s Office told the committee legislators need to focus on three different issues: gas price spikes, higher California fuel costs and substantial oil company profits. One policy, like the windfall profits penalty, likely won’t address all those problems, he said.

“Even with some targeted solutions, it’s quite possible that a policy meant to address one of them might have kind of adverse impacts on on another,” Brown said. “So for example, taxing profits and redistributing it to consumers could address the issue, if the legislature thinks the issue of excessive profits is the big issue. But it can also have other implications, of course, for prices and in both the short term and the long term.”

Some experts were more supportive of Newsom’s plan than others. At least one said candidly that it “won’t work.” As lawmakers pointed out, a majority of those who weighed in on the proposal had conducted work for the oil industry at some point during their careers.

“This is a really difficult call in any industry, and particularly in refining, because they have many different inputs, many different outputs,” said Severin Borenstein, director of UC Berkeley’s Energy Institute. “... The penalty or tax can allow the government to claw back some profits from high prices, but it can also disrupt the market. And for that reason, I think we have to be cautious in our use of it.”

Oil industry leaders said the state needs a better supply infrastructure to improve prices for drivers, even though the state is in the midst of transitioning to cleaner energy sources.

“The way to address prices and provide relief at the pump is to increase a reliable and safe supply,” said Catherine Reheis-Boyd, president of Western States Petroleum Association.

Newsom said in a statement after the hearing that the discussion showed a need to crack down on oil profits.

“Experts detailed how gas price hikes led to record profits and why we need greater transparency,” the governor said. “Big Oil’s lobbyists again used scare tactics and refused to provide answers or solutions to last year’s price spikes. We’re taking action to hold them accountable with a price gouging penalty and long-overdue transparency measures.”

Lawmakers question oil profit penalty

Lawmakers’ questions during the hearing showed some skepticism about the potential impact of a profit penalty.

Sen. Bill Dodd, D-Napa, worried about whether the profit penalty would have the governor’s desired effect.

“We all are about what’s happened to the lowest among us in our in our respective districts,” Dodd said. “At the same time, what I try to look for here is, what the hell are the unintended consequences, the possible unintended consequences that could hurt those very people to a greater extent?”

Sen. María Elena Durazo, D-Los Angeles, said she is “upset and angry” about the impact of high gas prices and vehicle emissions on poor and working Californians. Even so, she wondered whether this attempt to counteract these challenges would be effective.

“So what will be different about this?” Durazo asked. “What is different about the kind of information? What is different from every other attempt? And believe me, I’m looking for a solution here that will stop these gas prices from spiking the way that they have. But how is this different?”