Newsom Hopes to Outmaneuver Big Oil With Latest Profits Penalty Bid

Will the third time be the charm for Gov. Gavin Newsom’s crusade against California gasoline refiners for what he alleges have been unjustified price spikes in recent months?

This week, Newsom announced that he and legislative leaders have reached a deal on giving the California Energy Commission – whose members he appoints – power to monitor how oil companies transform crude oil into fuel, set limits on gross refinery profits and impose civil penalties for exceeding them.

“Together with the Legislature, we’re going to hold Big Oil accountable for ripping off Californians at the pump,” Newsom said in a statement. “Today’s agreement represents a major milestone in our efforts to drive the oil industry out of the shadows and ensure they play by the rules.”

The latest incarnation of Newsom’s drive to penalize refiners for price gouging was amended into a measure, Senate Bill X1-2, in a special legislative session that he had called to deal with the issue. He and legislative leaders plan to fast-track the bill, with the goal of placing it on his desk before the Legislature takes its spring break early next month.

The ambitious enactment is clearly aimed at giving the oil industry as little time as possible to lobby legislators. Its leaders, and business groups such as the California Chamber of Commerce, have labeled the proposed penalties as an indirect tax that will inevitably passed on to consumers.

The industry has been fairly successful in staving off efforts by politicians to regulate its operations. Last year, Newsom and the Legislature placed restrictions on oil wells near schools and homes but they are on hold because the industry has qualified a referendum to overturn the law for the 2024 ballot.

The oil industry, through the Western States Petroleum Association, is the largest single spender on lobbying the Legislature, exhausting $7.3 million in 2022. The association is also a major campaign contributor, and in alliance with unions representing field and refinery workers, has gained a significant toehold among the Legislature’s dominant Democrats.

Industry Lobbying Torpedoes Newsom Plan

That clout effectively torpedoed Newsom’s original plan to place hefty taxes on refinery profits deemed to be excessive. New taxes would require two-thirds votes in both legislative houses, leading Newsom to shift to civil penalties, which would be stated in law and require only simple majority legislative votes.

When the issue was explored in a legislative hearing, however, expert witnesses, including those not affiliated with the oil industry, cast doubt on the state’s ability to determine when pump prices had become price gouging. Legislators were obviously uncomfortable with casting votes to penalize something that could not be precisely defined.

Newsom’s third try is the deal he made this week with legislative leaders to dump the whole thing on the Energy Commission. The commission would be empowered to extract detailed financial information from refiners and set limits on gross profits and impose fines for exceeding them. Shifting the onus to an unelected state agency gives legislators some political cover and thus makes it easier to gain enough votes for passage.

Were the revised legislation to quickly gain legislative approval and be signed by Newsom, the special session he called could then be adjourned, and the new law would take effect 90 days later.

The 90-day window, however, would give the oil industry an opportunity to do what it did on last year’s oil well siting measure and take the issue to voters. It could quickly qualify a referendum that would suspend the new law until voters had the last word.

Given the immense financial stakes, there’s every reason to believe that the oil industry would take the opportunity.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. For more columns by Walters, go to calmatters.org/commentary.

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