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Price rise or simple supply and demand?

Angelenos may be paying $6.25 or more for a gallon of regular unleaded gas, depending on which gas station they use. AAA says the national average is $4.86, so Southern Californians are paying more than residents elsewhere in the US.

Are prices skyrocketing here due to gas taxes for road construction, repairs and maintenance? Is it because of the war in Ukraine and refinery capacity? Or are the oil companies taking advantage of the current economic moment and charging what they want? Most of the companies have made record profits in the last few years.

Sung Won Sohn, professor of finance and economics at Loyola Marymount University, says to look at the situation as a four-legged stool.

“Number one: Demand is very high, especially during the summer. Second, there are supply constraints and high costs. … Russia and sanctions — one of them. Next…California has all kinds of taxes, both federal and state, and that’s a major part of the price hike. And next, of course, control. … We need environmental regulations, but there is also a trade-off that limits supplies and raises prices.

However, Jamie Court, president of the consumer watchdog, says environmental costs and taxes don’t explain why Californians are paying $1.50 more per gallon than the average US driver.

“When oil refiners bought their crude oil contracts, they did [sic] Three or five years ago the price of crude oil was $50 or $60 a barrel. But they’re charging us gasoline prices based on crude oil prices, which is $129 a barrel, and they’re keeping the difference, the profit,” the court explained. “So we saw this in the first quarter earnings reports for two of the five refineries in California. There are five refiners that control 96% of the gas supply.

He adds, “Somebody has to step in and not only look at these profits, but come up with a new price-gouging law that regulates them, that says if there is a certain level of profit or more. A certain percentage of what companies are making in other parts of the country, that goes back to the consumer, that goes back to the state. Because this level of profit taking is just obscene and we haven’t seen it in this market in the last 10 years.

Sohn says the court’s comments about refineries’ profits are inaccurate. He explains that when people buy oil, they do it six months ahead, not three to five years ahead.

“I am not saying that some unscrupulous gasoline stations are not charging higher prices than they should be. But other than those few gas stations, it’s a matter of supply and demand,” says Sohn. “When demand is high, when supply is tight, of course the margin goes up. When demand is low, and supply is abundant, the price goes down and the margin goes down. So it’s very cyclical.”

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