Aftermath: California Gas Prices Are Up, and It’s Not Just the War

This story was first featured in the Aftermath newsletter, a series from David Dayen exploring the economic consequences of the war in Iran. To have these stories delivered to your in-box as soon as they are published, sign up for the newsletter here.

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Today we’re going to talk about gas prices, which are high everywhere but especially where I live in California. It’s a long and involved story, but I hope you stick with it! And tell a friend; it shouldn’t be this hard to understand the truth amid all the disinformation. Send them to prospect.org/aftermath for all of our stories about the consequences of the Strait of Hormuz crisis.

Are We Still at War?

I mean, who knows? Meetings keep getting set up and blocked; the latest is that the Trump administration is mulling over an Iranian offer to open the strait and then postpone nuclear talks. This would call into question why we ever went to war in the first place; opening the strait isn’t a concession but the state of the world before the attacks began on February 28.

Market Power at the Pump

There’s a Chevron station near Chinatown in Los Angeles that is a magnet for news cameras anytime gas prices spike in the country. As the war in Iran has throttled supplies, the Chinatown Chevron hasn’t disappointed, peaking at $8.71 a gallon.

This station is a symbol of a state with the highest gasoline costs in the country. And it has set off the usual criticism about high taxes and environmental regulations making California borderline unlivable for the non-rich. A CBS report highlighted these factors earlier this month, claiming that no gas price-gouging was evident, and other parts of the conservative ecosystem, from Fox News to the Department of Energy, have taken their shots as well.

But the real reasons for the sticker shock can be seen in a little-known measure of refinery profitability known as the crack spread. Where California refineries were making about 50 cents per gallon in profit just two months ago, the crack spread has ballooned to an estimated $1.50 per gallon. That means it accounts for more of the recent run-up in state gas prices than the hike in crude oil costs, which is adding roughly 66 cents per gallon. Refining margins are currently almost twice as high as the cost of state taxes and regulatory fees (about 87 cents per gallon), the topics libertarian critics always stress as the reason for California’s outlier status.

Sometimes this is called a “mystery gasoline surcharge.” Even after accounting for taxes, regulations, fees, and environmental programs, California consumers paid $59 billion more between 2015 and 2024 to fill up than drivers in other states. The reason why isn’t a mystery though, explained Jamie Court, president of Consumer Watchdog, a state advocacy group: “We have four oil refineries that make 90 percent of the gasoline. It’s the most consolidated refinery market in the world.”

California is known as an “energy island”: The oil industry, which has deep roots in the state, relies primarily on local refining capacity. No pipelines serve the state with refined gas, and until recently fuel imports were very low. Many refineries still active today are over 100 years old. (Fun fact: The city of El Segundo, near LAX Airport, is so named because it was the location of the state’s second refinery, after the Standard Oil of California—now Chevron—facility in Richmond.)

With this consolidation, refinery owners can squeeze supply and raise margins simply by closing down. Currently, there are two shuttered refineries in the Bay Area: a Valero facility in Benicia that started idling in late January when it wasn’t supposed to close until April, and a PBF Energy refinery in Martinez that was supposed to come back online in full in March after a fire last year (one of three explosions at California refineries in 2025), but which has not done so, according to Court’s communications with worker representatives. This has spiked prices in the Bay Area to levels that are around $2 a gallon higher than the rest of the U.S., something that started before the Iran war.

When California can’t meet refined gas supply, it imports from the Pacific Northwest and Asian countries like South Korea and India. About 20 percent of the state’s refined gas comes from seaborne imports, and because some of these imports originate in the Middle East, volatility has increased. The low supply creates opportunities for local refineries to gouge gas stations with higher margins, which naturally hits drivers too.

Critics argue that California’s transition to clean energy has caused refineries to flee the state. But the crack spreads indicate that there’s still a lot of money to be made off a population of 39 million, most of whom are still driving gas-powered vehicles. And this issue is long-standing: A report from 1999 by then-California Attorney General Bill Lockyer noted that price increases “are largely the result of the concentration and control oil companies have over the production and sale of gasoline.” With mergers like Exxon and Mobil since then, the problem has only been exacerbated.

You also see that the industry isn’t committed to its claim about burdensome regulations being a problem by its opposition to a State Assembly bill that would allow exceptions to the state’s particular blend of gasoline (known as CARBOB). “This fuel would likely come from foreign competitors that make conventional fuel that do not have the environmental and labor standards that are required in California,” the Western States Petroleum Association said in a letter opposing the bill. In other words, oil companies actually prefer California’s strict regulatory approach because it maintains their relative monopoly on refining capacity. (Incidentally, in recent years California’s cleaner-burning blend has significantly improved air quality, and other states have followed California’s lead, making importation much more viable.)

A related problem is vertical integration. Many refinery owners, like Chevron, also supply their own branded gas stations through exclusive dealer contracts. Even companies that gave up refineries, like Exxon and Shell, kept the rights to supply their branded gas stations through those facilities. Starting in 2015, after a major refinery fire in Torrance caused prices to jump, branded stations must pay for the “dealer tankwagon,” which refers to the transportation costs of the vehicle distributing the fuel. Stations pass that cost on to the customer. As a result, the difference in price between branded and unbranded gas stations is on average 30 cents a gallon and can be as high as 60 cents or even a dollar, like at that Chinatown Chevron. That is much larger than the spread between branded and unbranded gas in other states. Branded stations are typically located in more geographically desirable areas, so they benefit from consumer laziness or time constraints.

Branded gas stations claim that their gas is cleaner-burning or better for performance. Chevron constantly advertises that their gas has Techron, and if that sounds like a made-up term, that’s because it pretty much is. “There’s no difference, there are higher-quality standards for every brand in this state,” said Kate Gordon, a former senior adviser in the Department of Energy and currently CEO of CA FWD, a state climate advocacy group.

THE LAST TIME THAT CALIFORNIA EXPERIENCED a gasoline supply shock was 2022–2023, when prices set records. At that time, Gov. Gavin Newsom called emergency legislative sessions and took several steps. The legislature placed a limitation on the maximum margin that refiners could take, but that anti-price-gouging measure was abandoned after two refiners announced closures in retaliation for the state daring to cap windfall profits. There were two other consumer safeguards. First, when a refinery plans to go offline for maintenance it has to sign a resupply agreement to backfill the inventory; second, refineries are required to have minimum inventories to prevent supply shortages and price spikes. But the state Energy Commission has yet to write either of those regulations, either.

“Those rules would have protected us right now,” said Court, whose organization has blamed Newsom for backing off his aggressive moves against the oil industry when they threatened the state’s gas supply. “This price spike is 60 percent Newsom and 40 percent Trump, and that’s a little generous to Newsom,” he said.

One aspect of the special session did go forward. The state created the Division of Petroleum Market Oversight to monitor the industry for anti-competitive conduct and problems of market structure. The division, led by Tai Milder, who worked under Jonathan Kanter in the Department of Justice’s Antitrust Division, receives high-quality data to assess the state of the market, and put out its first annual report last year, covering 2024. “Sometimes you hear that California gas prices are unexplained. I think we’ve more or less explained it,” Milder said. And indeed, the major factors for the state’s high gas prices are higher industry margins and market power.

Milder’s office is looking into dealer tankwagon and vertical control of retailers, and how that leads to outsize margins for some refiners and eventually higher prices. Help may also be on the way in the form of a joint venture called the Western Gateway Pipeline project, which would reverse an existing pipeline that could deliver fuels to Southern California rather than export them out. “To not allow substitution is a competitive moat,” Milder said.

This has become an issue in the upcoming governor’s race; gas prices were the first question in last week’s gubernatorial debate. Xavier Becerra, the former state attorney general and Biden cabinet member whose poll numbers have improved since the exit of accused sexual predator Eric Swalwell, was caught on tape last week saying, “I need Chevron” and “they’re not the bad guy.” Chevron maxed out to Becerra for $39,000, its first donation in a gubernatorial race since 2014.

Tom Steyer, who is in the top tier of candidates along with Becerra, has called on him to return the Chevron donation. Steyer wants the state to institute a windfall profits tax. “We can rebate this [windfall profits tax] to people … We’re getting screwed by a bunch of Texas oilmen,” he told me last month. Indeed, oil companies are making $30 million per hour in additional profit since the crisis began.

Reinstituting the maximum margin would reduce those windfall profits without having to resort to a tax. Other candidates have suggested a holiday for state gas taxes, which pay for road repair. But there’s no guarantee that would be passed on to consumers. And all of these solutions are more short-term, part of a managed decline where the state is trying an energy transition on the fly while simultaneously protecting the most vulnerable from the consequences. The transition to electric vehicles and other cleaner cars has worked to some extent; Milder told me about an independent analysis showing that since the war, Texas consumers have spent more additional money on gas than California, despite having eight million fewer people and lower prices.

Keeping the market competitive can manage the transition and prevent gouging. But as Gordon said: “There is no long-term answer to this problem other than reducing our dependence on oil.”

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