new california legislation misleading, chevron exec says

Chevron is concerned by the recent Committee and Assembly passages of ABX2-1 and seek to address some of the inaccurate and flawed arguments made by its proponents. As the Senate prepares to vote, it is crucial that it makes a fact-based decision. The political posturing that has characterized these proceedings must stop, including baseless and frankly ridiculous claims that the industry is engaging in price gouging. Let us have a balanced, fact-grounded conversation about the state of California's fuels marketplace, a marketplace weakened by misguided policy decisions, driven by misleading rhetoric.

Across the three dozen states in which we work, the California government remains unique in its focus on marketplace interference with negative effects on consumers resulting in the highest U.S. gasoline prices. California has investigated the industry numerous times for price gouging and come up with no evidence or charges. Chevron has been a trusted partner to California consumers for 140 years. We value that trust as we strive to reliably provide ever-cleaner fuel to Californians and our neighbors.

Two propositions ostensibly justifying the emergency regulations are wrong. First, the claim that regulation is justified because "price spikes are profit spikes" is misleading. Second, the claim that "refiners did not adequately prepare for [planned maintenance events] by increasing inventories and imports," while we do not speak for other refiners, we believe this to be uninformed and not how we operate.

Economic fundamentals force prices up when demand outstrips supply. This signals the need to bring in more expensive finished gasoline or blending components. These statements about price spikes also overlook that supply shortages are an outcome of California's regulatory policy and fail to reflect the energy industry's cyclical nature. While we do not purport to speak for the industry, quite apart from the unfounded allegation of price gouging, there are many instances where net refining margins are negative, causing refineries to operate at a loss¹.

The suggestion that refiners mishandle inventory prior to shutdowns is likewise an ill-informed generalization. We have contractual obligations to supply our customers and go to great lengths to meet them. It is common sense that refiners use the available tankage infrastructure to store as much product as they can, so that they have inventory on hand to meet California's high demand, particularly during the summer driving season.

Ill-considered regulation on top of 20 years of bad policy is risky under normal order; to do so under the rush of special session is folly. California's policy choices have led to a gasoline shortage by driving suppliers away. We have a shortage of incentivizing policy for additional refiners and supply. California, stop making consumer conditions worse.

Now that we have addressed the rhetoric behind this action, let's discuss the bill's specific issues. The bill still shifts maintenance safety standards to bureaucrats who lack refining experience, taking it away from knowledgeable experts and regulatory agencies responsible for protecting refinery workers and our community. This undermines the decades of expertise our teams maintain for ensuring safety in refining operations.

Prior to the Assembly's vote, you asked industry to present a case to refute the alleged costs savings of billions of dollars for consumers - claimed by the policy advocates. We contend that enforcing a mandatory minimum inventory requirement will likely result in two negative outcomes: an increased frequency and duration of supply shortages, and a permanent rise in gasoline prices for consumers. Both risks extend beyond California, which should create the need for the legislature to proceed with caution, as policies that raise prices for the state could also affect neighbors in Arizona and Nevada.

How does this bill potentially exacerbate shortage events long enough to form lines at gas stations? We ask this because DPMO and CEC have not analyzed the existing capacity constraints available to refiners. The graph² that DPMO presented as their sole evidence of viable refiner inventory footprint ignores the potential capacity constraints related to fuel specification seasonality, available marine shipment capacity and blending tank working capacity³. These capacity constraints may reduce storage available during higher demand months. Furthermore, mandatory inventory thresholds remove significant supply from the market that refiners would otherwise sell, creating an economic fundamental of driving up wholesale prices. When refiners build and maintain inventories, it reduces the quantity available for immediate sale, thus restricting supply.⁴

How does this bill create permanent gasoline costs to consumers? There is significant cost involved in building and sustaining a mandatory inventory threshold that is not included in the proponents' cost analysis. Costs to consumers can occur either by creating the shortage of supply which shifts the marketplace fundamentals as described in Appendix B or because refiners must secure additional storage. For example, just 20 cents per gallon in carrying costs leads to billions of dollars per year in extra expenses for Californians and our neighbors⁵. Costs to hold extra inventory would be on top of the prices paid during the price volatility seen when demand outstrips supply.

That ABX2-1 lacked additional amendments, despite extensive stakeholder feedback during the hearings, demonstrates that the Assembly chose to act based on politics- under the veil of a thinly studied basis fabricated by CEC and DPMO. Assemblymembers shared concerns regarding the bill's language. They provided critical feedback and recommendations such as addressing safety concerns by removing the CEC's authority to limit timing for planned maintenance; ensuring a robust process for drafting regulations; ensuring a shorter timeline for requirement sunset; and establishing an independent review panel to participate in regulatory decision-making. These suggestions and other opportunities for improvement were ignored. This bill makes bad policy worse-it suffers from the dearth of debate and informed analysis needed to address the complexity of the issue.

I leave you with final thoughts to consider. Without investment in the critical energy infrastructure that allows California consumers to live their daily lives, your body will ensure these products become more expensive and less reliable. The California gasoline marketplace is constrained, and government manipulation will only increase prices⁶. To boost supply and reduce consumer costs, we need to rethink the policies that limit supply. We urge consumers in California, Arizona and Nevada to contact their governments to ask about the cost of any new or amended energy policy. We will do our part to ensure California consumers are informed about your role in shaping policies making life even more unaffordable.

Responsible refiners make investment decisions every time equipment becomes closer to their end-of-life and requires routine maintenance to sustain safe and reliable production capacity, for example Chevron spends nearly $800 million dollars in annual capital to maintain our refining facilities. These policy decisions can cause the idling of units as refiners consider whether to reduce the on-going capital needed to maintain capacity infrastructure or pursue opportunities to expand production and capacity in other states. Voters will hear about how you've made the state "uninvestable" by reducing refiners' incentive to invest the annual capital needed to maintain the fuel production capacity needed to keep California, Arizona and Nevada energy costs affordable, reliable and ever-cleaner.

Sincerely,
Andy Walz
President, Downstream, Midstream and Chemicals

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