Assembly Standing Committee on Petroleum and Gasoline Supply

Good afternoon. Good afternoon. I'd like to call this hearing of the Assembly Committee on Petroleum and Gasoline Supply to order as part of the second extraordinary session. We're here today for an informational hearing which will lay the foundation for policy discussions that will be happening throughout this extraordinary session.

Today's agenda will cover the basics of California's petroleum economy and the state's plan for its future transition. Before we begin, I have a brief housekeeping announcement. I will maintain decorum during today's hearing. As is customary, conduct that disrupts our proceedings will not be permitted. Any individual who is disruptive will be removed.

California's fuels transition plan is one of the most complicated and most important challenges that we, as policymakers will need to navigate in the decade ahead. We do not take this challenge lightly, nor frivolously. Gasoline demand is shrinking. The market supplying gasoline to the state is constricting.

As a consequence, prices have grown more volatile, and that's hurting California families. We cannot and do not expect Californians to just accept sky high prices. We don't expect people to just accept price spikes. That's why we're here, to identify solutions to stabilize prices, to deliver savings for Californians as our state transitions to a clean energy economy.

As we do this work, as with all policy matters, it is absolutely imperative that we thoroughly vet any proposal that will impact the lives and the pocketbooks of 40 million Californians, that we are aware of potential unintended consequences as we plan our future strategies, and that we're clear eyed in the decisions that we make.

And that's why we are beginning this extraordinary session with kind of what I'm thinking of as petroleum markets 101. So today's hearing is an opportunity for us to focus on and understand the fundamentals, how does California's petroleum market operate today? What are the price signals and how are prices determined?

And what makes our market unique compared to the rest of the country today. We'll also provide an overview of California's decarbonization strategy and a preview of the transportation fuels transition plan.

Tomorrow's hearing will build upon this foundation, providing insights into what currently impacts the supply of transportation fuels, examining the administration's proposal to require minimum inventories on refiners, as well as examining other potential supply interventions.

I will note that given that today is really supposed to be foundation level setting, information setting, as we have questions that are related to the Governor's proposal or other matters, I may pause that line of discussion, kind of put a pin in it so that we can focus on those questions tomorrow. So with that, before we jump in, I'll go ahead and turn it over to my colleagues for any opening remarks. Assemblymember Hart

I want to thank Chair Petrie Norris and Speaker Rivas for establishing this Committee on gasoline supply so we can convene a transparent stakeholder process on the State of gasoline production inventory and its impacts on our constituents.

We're here today to begin the careful and serious work of finding solutions to ease the burden of rising gasoline costs that hurt California constituents. Transitioning to a carbon neutral energy future is a complex endeavor, and I recognize the challenges.

But the longer we delay in transitioning to a more sustainable energy framework, the more we risk volatility in gasoline prices. We've all been back in our districts since the end of the legislative session, and we've heard loud and clear from our constituents that Californians are very worried about rising prices.

Increasing housing prices, increasing grocery prices, increasing energy prices, and increasing gasoline prices are all hitting California families very hard. Without swift action, consumers will continue to bear the brunt of fuel price fluctuations. Transparency in pricing and supply chain operations is critical. Today's hearing will help build the factual foundation we need to pass effective legislation.

I'll be listening closely in the days ahead. I'm convinced we can equitably manage this transition if we work together. Let's roll up our sleeves and get to work. Thank you.

Thank you, Assemblymember Jackson.

Thank you very much, Madam Chair. I also like to thank the speaker for creating a process where we can thoroughly vet and making sure that not only we know, but the public knows exactly what we are voting for or against. And I would think that certainly I hail from the Inland Empire, one in which relies heavily on our vehicles. And so myself being one back in my younger days, having to commute to LA, back and forth each day, 2 and a half hours each day. I have the receipts. I have the road rage to prove it.

But also understanding those days where you just didn't have money, enough money to fill up the tank and whether you would make it home each day and even when it's on E. Well, is it really on E? Hopefully I can at least make it to the off ramp. Right?

And so the idea is, this is very serious, and I am grateful for the process, Madam Chair, of that you've going through to making sure that we're properly educated on these issues so that we can really make sure that we are making the most thoughtful and responsible decisions. This is an issue that we cannot afford to make.

This political theater. We can afford to just say we've done something. We have got to make sure that whatever we do actually lowers gas prices. And anything less, for me, at least, and I'm sure my constituents would agree with me, it's not acceptable. I look forward to the process. And thank you very much.

Thank you, Assemblymember. We'll go ahead and turn it to Vice Chair Patterson. Thank you.

Thank you, Madam Chair. We have two hearings, one before us today, one before us tomorrow. As the Vice Chair of utility and energy for the last 12 years, this is an area that concerns me. It's an area that I think we first of all need to fully understand California's petroleum economy.

This hearing is the foundation for us to be able to make well informed decisions with respect to the Bill when and if we see it. And so my intention is to really be a sponge today. Listen, I'm going to take a lot of notes, but when we get to tomorrow, that becomes where the rubber meets the road.

And I will have some comments and also some questions with respect to making sure that we do lower costs, but we do it in a way that doesn't create unintended consequences. We have a number of warning signals from the CEC and others that squirreling away a large supply of gasoline could actually work in the other direction to basically be, if you hoard it away and the demand is there, prices are very likely to go up.

And I think that there's also some information on some of the reporting that we'll hear, maybe testimony today that if we lose one more refinery in the State of California, it's going to be catastrophe. And so we've got to be very, very careful, and we've got to understand the complexities.

This hearing gives us the chance to understand that tomorrow. Then we're going to have to start saying, okay, now we understand what we have in front of us. Let's make sure that we govern wisely and choose wisely, making sure that we understand that there could be unintended consequences.

And at the same time, I think we owe it to our constituents to work very hard to understand the complexity, but also to act in a responsible way. And I think that today's hearing provides that opportunity for a depth of foundational understanding. Tomorrow we're going to have to decide on how we go about making decisions.

Now that we know what we know, will the Bill in front of us accomplish that end, or will it exacerbate a bad condition in the first place? And so I'll wait until tomorrow to dig down into that and ask some more specified questions.

Wonderful. Thank you, Vice Chair Patterson. Assemblymember Bennett.

Thank you very much, chair, Petrie Norris. Market economies work very efficiently and in everybody's best interest. When you have a good market and a healthy market, that means healthy competition and adequate knowledge for everybody to make proper decisions.

I think what the CEC has been able to find out since our 2023 action, which opened up some of the information that the CEC did not have, is that the market economy that we have right now, and the gasoline market in particular, does not reflect those ideal components of a market economy. With healthy competition, with adequate knowledge by all of the participants that are out there, we are in California at great risk as we're making this transition.

Very rarely do you see a majority industry in a situation like this with a declining demand curve and a stairstepped decrease in supply that could come with, as has been pointed out, the closure of one refinery. And suddenly we have this stair step drop and the potential negative impacts for Californians that could come from this situation.

So all of us are at risk, both consumers and producers. It is fiendishly difficult to try to make this transition proper. So if we don't have a pure market economy that we could rely on, which I would much prefer, we stay out of it, let the market handle it. But we don't have that situation.

The question that I ask is this, should the representatives of the people of California just sit back and let this transition take place and let an ever increasing concentrated group of market players make the decisions that we hope protect consumers, or should we intelligently get involved? And that's what tomorrow will be about.

How do we intelligently get involved? But one of the fundamental questions that we will have to address in this combined today and tomorrow is, is the CEC the appropriate agency to do this investigation? And I would just like to say at the start of this, the information I've received from the CEC and other stakeholders has been very balanced over and over again. They pointed out both the pros and the cons of each of the solutions that they had. That's how you get to good policy.

And so the stakeholders that are going to participate today and tomorrow, I very much appreciate that the chair and other people made sure that we have a balanced group of stakeholders, and those stakeholders that should have the most influence are the ones that have the most credible arguments.

And that means people that are not presenting us just a one side of a point of view, but that recognize we have to be there to do what's right for Californians overall. So again, I really look forward to this, and I appreciate getting this opportunity to put my thoughts in the General context here. Thank you very much.

Thank you, Assemblymember. Assemblymember Rubio.

Thank you, Madam Chair. I also want to thank the chair and the speaker for providing this opportunity for us to really review the information. I'm the first one to tell you that I am not an expert. My expertise is I go and pump gas. That is, as far as I go.

Where it comes from, who produced it is completely out of my realm. And that's why I'm looking forward to today's informational hearing. But I also want to caution that whatever happens outside, I know there's a lot of mudslinging going on. I want to ignore that. That is not why we're here.

This is, for me, strictly informational, strictly to learn exactly what the process is and how this all works together. The politics of it doesn't help us make fair decisions and balance decisions, as one of my colleagues just stated. So I want to, I see the press here, and I appreciate you being here.

I think that this is the opportunity for us to learn how this whole system is put together and make those decisions, because I like my colleague from Riverside, my community in the east, San Gabriel Valley, drives very, very far to get to work, to downtown LA, to the Inland Empire, and they are the ones that bear the cost of any decisions that we make or we don't make.

So I want to thank you again for this opportunity today. I'm ready to learn, and definitely we'll have some questions tomorrow. I want to give the stakeholders an opportunity to present their case, to present their information so that I am well educated after this, so that we can make a decision or no decision at all. Thank you.

Thank you, Assemblymember Wood.

First of all, thank you, Madam Chair. And I also want to thank the speaker for putting this Committee together and appreciate the balance of the Committee as well. I think it's really strongly representative of the entire state and the folks that make up our constituencies. I come from a blended family.

I have an electric car, and I have a gasoline powered car. And so I understand the struggles for both. And the infrastructure for the electric car is still evolving in many, many ways. We have challenges related to energy transmission and interconnections and energy in that respect.

And yet, on the other hand, we have a gasoline industry that's heading in a different direction. And so we're at a really interesting crossroads here. And so I'm really looking forward to the opportunity to learn more about some of the gasoline industry. And I hope at the end of this, I also want to thank the Governor for calling the special session, which gives us the opportunity to act on a Bill at the end of this.

And my hope is that what we come up with, if we make changes or we do ultimately vote on a Bill, that the perfect does not become the enemy of the good, it's important that we make progress. I think the citizens of California are demanding that, and I look forward to the process. So thank you.

Thank you, Assembly Member Lee.

Thank you, Madam Chair. I do want to thank the speaker for creating our special Committee for today. And I also want to thank the Governor as well for convening a special session. I think California consumers deserve that specific focus from us on gasoline prices.

But I think just to be brief about it is, I think it is incredibly fitting that we are ending our two year legislation on a special session. When we began our legislative two year session with a special session on the very same topic in 2022, gas had incredible spikes where people had eye watering prices at the pump twice in one year. Twice in one year.

And since the legislation was signed into law in the first special session in March 2023, there have been zero price spikes and prices have been very stable.

So I look forward today to receive our crash course education today, but also to understand more so that we can be better informed, making policy so that we avoid price spikes the future and empower the CEC to continue doing its mission of keeping us informed as well as the public so they have confidence that big oil is not getting way too many profits. Thank you.

Thank you, Assembly Member Papan.

Thank you, chair Petrie-Norris, I really appreciate your opening remarks and how we're going to proceed. I also want to concur with Assemblymember Lee that this is a tremendous opportunity to fully, that an everyday commodity that's going to affect probably every californian, and we would not be doing our job if we didn't have a special session.

So I thank the Governor, I thank the speaker for convening this, and I thank the chair for her leadership, because it couldn't be more important that this issue be in this potential legislation, be fully vetted for the public. They deserve it. That's why we're here. And I look forward to a very robust and meaningful discussion.

Thank you, Assemblymember ZBur.

So I want to thank the chair for convening us. I want to thank the Governor for calling the special session and the speaker for forming this Committee, which is, I think, a very balanced one. And I think even though there are different perspectives on this Committee, I think we all share the goal of making sure that we're reducing oil gas prices for California consumers. That's the goal of this Committee. That's the Governor's goal.

And I think that's the perspective that we're all approaching this with and understanding at the same time that this is a very complicated set of issues. The Governor has a thoughtful proposal that he's put on the table, and it's our job to make sure that we are asking the right questions, making sure that we're actually achieving the objective that the Governor and that we all share, which is really making sure that gas prices are affordable for California consumers and that we're reducing gas prices overall. So thank you very much.

Thank you, Assemblymember Gipson.

Thank you very much. Good afternoon. I want to again align my comments with my colleagues, one thanking the Governor because it's through his authority that we have been brought together, and also our speaker for his leadership, and also to our chair and to our vice chairs. This is a very important conversation today.

I'm excited to be here, one with all my colleagues. And again, it's a very balanced selection and composition of individuals from those who represent petroleum and those who don't, those who support the environment. I think everyone in this body supports the environment. But one is the discussion that we need to have in terms of high and why are we paying so much at the pump?

This is not only a discussion about gasoline, but it's also a discussion in my mind about jobs, about the supply chains, and how we can, we can make sure that the state is self sustaining for energy needs and meeting those energy needs and our goals and objectives around the environment, which is absolutely critical.

As the Chair of the Select Committee on the Ports and Goods Movement in the State of California, this topic is not new to me for my role as the chair of the Select Committee. Nine months going up and down the State of California, visiting our ports and hearing from stakeholders, laymans, business owners and things of that nature.

It is very critical that we come together and try to reach some kind of reasonable balance and a reasonable conclusion on where we need to go and how we need to move in the direction that meets these goals, at the same time driving down gasoline prices in the state. This panel has been assembled here.

Certainly I've read the background and I'm looking forward to discussions and one learning and educating me in this very, very important matter. We have to do this because it's our jobs and our responsibilities and so I look forward to engaging in fruitful conversation to that end. Thank you.

Thank you. Thank you, colleagues. Thank you all for serving on this Committee as part of our extraordinary special session. Grateful for your partnership and your leadership and collaboration as we look to identify solutions to deliver for Californians. So with that, let's go ahead and jump into our first panel.

Our first panel will provide an overview of the entire petroleum supply chain to detail how this all works in practice and how it is. We have one panelist, I believe, joining us here in person. We're joined by Tom Robinson, who is the Chairman of Robinson Oil.

Okay, Mister Robinson, you can go ahead and approach the dais, and then your fellow panelists are going to be joining us remotely. So we're also going to be joined by Neale Mahoney, who is a Professor of Economics at Stanford University, and by Skip York, the Senior Economist and Energy Strategist for Turner Mason and Company.

And we've divided this panel into kind of two subsections. So the first, we're going to focus on the production cycle. And so I'd ask each of our panelists to provide their comments related to the production cycle. We'll then pause for Committee questions before we move on to the next subtopic, which will be the market and pricing. So let's see, we're going to go ahead and begin with Professor Neale Mahoney. So we'll just get him on the screen.

Hello. Good afternoon, everybody.

Good afternoon. Good afternoon, Professor. We can hear you. We can't see you yet, but we can hear you. And I will just flag for Committee Members that Professor Mahoney's slides are in your background, materials in your binders, if you'd like to look at them. There. Professor Mahoney, the floor is yours. Thank you for being here.

Thank you to the Chair and the Members for the invitation. It's an honor to be here today to share my perspective and help you build a foundation for evidence based policy making. So, I have two slides for this component of the session. If we could advance to the next slide, that would be great.

So let me start with something that I think many of you already know, which is the California gasoline market is both isolated and concentrated. California refineries import the majority of crude oil they use from abroad, from outside the United States. They then process it into refined products like gasoline blend stock and diesel.

Then these refined products are transported to racks, where they are then purchased by gas stations. Because of limited pipeline infrastructure and seaborne transportation, California's ability to obtain out of state imports of gasoline is restricted. Indeed, five refiners, five refining companies control virtually all of the California grade refining capacity.

And 11 refineries produce 90% of California's gasoline and diesel. Can we move to the next slide? So, as I've mentioned, California refineries turn crude oil into gasoline blend stock. After doing so, the gasoline can either be sold in bulk in the Los Angeles or San Francisco spot markets.

It is sold to retail gas stations at one of 14 racks, or it is stored in inventories for future sale. And the tanks that store these inventories use a first in, first out inventory system to prevent gasoline from going stale.

After gasoline is piped to the rack, the blend stock is mixed with ethanol and brand specific additives to produce the gasoline that we pump into our cars. Trucks carry this gasoline from the rack to underground storage tanks at gas stations.

And as I'd said, obtaining gasoline from out of state, typically from Europe or Singapore, is difficult and can take more than a month. My next two slides, I believe, are for the next component of the information session. So I'm happy to yield the floor and pass to the other Members of this information session.

Okay, wonderful. Thank you, Professor. We'll now go to Skip York, who's joining us from Turner Mason and company, also providing virtual testimony.

Okay, so hopefully my slides will appear on the screen here in a second. I'm going to speak to you about two different links in the supply chain. The first link is, I'm going to walk you through the refinery.

So once we've got the crude oil, how do we get it to the refinery and it goes through the refinery? Then the second link is going to be that logistics links that comes out of the refinery, and then how do we get it to the terminals so it's ready to go to the retail service station.

So this very first slide is to just put this, just to put the petroleum system in perspective, this is a view of the entire energy, the transportation system for all energy.

So whether it was you were going to use biofuels or refinery or electric vehicles, this is a view of how that entire system looks, what the entire system looks like. We're going to focus today on what's inside that orange box. So if we can go to the next slide.

So now we're going to look at, and this is where my comments are going to break down. Basically, the first set of comments are going to be on the right hand side. That's going to be taking that crude oil into the refinery.

And we'll talk a bit about how those molecules have to be stored in different storage tanks and then moved around within the refinery. Once we've got that product finished, we'll then move it into a pipeline system.

And then we'll talk about in the second set of comments about how we move from the pipeline system into the fuel terminals. And then we'll talk about what happens inside a fuel terminal to get the product ready to go out into the tanker trucks and head out to the streets.

So if we go to the next chart, this will be a very simple view of what a refinery looks like. And a refinery really does takes crude oil. And there are really sort of three processes, three types of processes that go inside, that go on inside a refinery.

When you're trying to make a fuel, you can either go, the one process is distillation, and that is where we're going to separate molecules based on temperature. So in essence, we're in that unit called the crude distillation unit. We're going to boil the crude, we're going to heat it up.

As the crude heats up, it starts to vaporize, and we will pull those molecules off to other units. So we're distilling it, and so we're separating by temperature. Another way that we could process those molecules is through cracking. And cracking is exactly what it sounds like. We're going to break molecules.

So once we've distilled it, some of those molecules will be very long, will have very long chains. And what we're going to do is we're going to break those chains into smaller molecules that get us closer to a finished product.

So if we're looking at gasoline, the unit that we use to break those molecules down is called a fluid catalytic cracker. And you'll see it in the dark blue on the lower right. So we take those long chains that come out of the bottom, out of either what's called a Coker unit.

It'll be called something like coke or gas oil. And then we'll move it into the catalytic cracker. That catalytic cracker will break those molecules down. And one of the big products that comes out of that catalytic cracker will be something that we call cat gas. And that'll be a product that we then send towards the gasoline pool.

And we'll go and we'll store it in one of the tanks in the upper right. The third way we could process molecules inside a refinery is we reform it. By that, we mean we rearrange it.

And what we're doing in terms of gasoline with reforming is we are looking to way to change hydrogen bonds in order to increase octane.

And there's really two, for gasoline, there's really two units that refineries predominantly use to do it that's called a reformer or an isomerization unit that you see sort of in the middle light blue unit there. And that is a unit where we would take a material that comes off the distillation unit called naphtha.

We would run it into the reformer, and we would sort of break off the hydrogen, and that would improve the octane of the remaining molecules that come out. And that's called reformate. And that reformate heads towards the gasoline blending pool. Or we could do another unit called alkylation, where we take smaller molecules.

So kind of the opposite of cat cracking. We're going to take smaller molecules and I force them together, and that is going to result in a material called alkalate. And that alkalate is going to have a high octane. It's a very good blend stock for gasoline, and we're going to send that to the gasoline pool.

Now, as we're going through this, we're also going to be doing something else to these molecules. So as we're making molecules towards finished products, we're also going to be cleaning the molecules. And the biggest cleaning that we do is desulfurization. So we could be desulfurizing, desulfurizing these molecules at various changes stages as we move through this refinery.

So we could be doing it a number of times. And that way we get all the way down towards a finished product like ultralow sulfur diesel or CARB gasoline. That has to be, that has very Low sulfur standards, very tight sulfur specifications.

And the way we meet those standards is by desulfurizing it as several times those molecules, several times as we go through the refinery. Now, this is a very simplified view. To get an idea of what it really looks like just for the gasoline portion of the refinery. Let's flip to the next slide.

And this gives you an idea of, if you were actually looking at a refinery, this is what the gasoline part of a refinery would actually look like.

All these units that are sending streams to each other and sharing streams and then moving them on to other streams, these blending of crudes and optimizing these operation and the environments, because we can actually change how each one of these units operate in order to change the yields that come out of them.

So as we're changing blending crudes and we're optimizing the operating environment in order to make the suite of finished products, because refinery doesn't make just one product, it's got to make a suite of products that comes out, and it's making a suite of products that the refinery thinks it can sell into the, into the market.

And that's a very complex process.

So the way they're going to handle this complexity across all those suites of products is by running a very complex Linear program through a computer, which is going to use volumes, cost, unit operations, and expected prices to optimize what's the best use, what's the most optimal use of the crudes that it has available in order to get the products that the refinery thinks it needs to sell into the market.

And what's important to remember this as you go through this optimization scheme is that the refinery must continuously stay in balance, meaning that every input into the refinery must be accounted for as a product, so nothing can be left behind.

The refinery must always stay in balance so that it can, so that, so that we don't end up with what's called, you know, loss of containment and material ends up going missing somewhere because someplace. So let's go to the next slide, and now let's talk a little bit about, specifically about how California refineries are designed.

California refineries were really designed sort of in two stages. Early. The early California refineries were designed for the California crude. And they were designed, they were configured to take the California crudes, specifically the heavy crudes coming out of the San Joaquin Valley and to convert those to gasoline.

And then later on, there was another phase of California refineries that were designed when we started to develop crude oil in the Atlantic coming out of Alaska. But, and those refineries were also configured to take the optimal amount. What was the optimal way to take Alaskan crude or California crude and maximize the amount of gasoline?

And that's the important thing to remember, is that California refineries were designed to maximize the amount of gasoline to make. And if you look across the United States at pads, which are the Petroleum Administration defense districts, it's the way we group the petroleum markets in the US.

The gasoline yield in pad five, which is where California sits, the gasoline yield in pad five is the highest gasoline yield of any of those petroleum markets in the United States. And that was by design. The refineries were designed that way.

And so as a result, as you look at this barrel, there's not a lot of flexibility for gasoline in the California refining system, because the system was designed to squeeze as much gasoline out of the barrel as possible.

What we are seeing is in the flexibility is that as more renewable diesel is coming into California, that refiners are pushing petroleum, are pushing petroleum, diesel molecules into the jet fuel. So they're making more jet fuel now for the same crude slate that they were running, say, five or six years ago.

They make more jet fuel today than they did five or six years ago, because they're trying to find a way to not make petroleum diesel, because they've got, the renewable diesel is fulfilling so much of California's diesel demand. So let's go to the next slide, and let's talk about this tank, the tankage issue.

You're going to see tankage all throughout the refinery at different stages. And let's just briefly talk about what is that tankage. So this is a picture of a tank, and we'll often talk about two parts, two capacity figures in a tank. We'll often talk about the shell capacity, and that's the entire size of the tank.

But you don't use all of the capacity of the tank, all of the shell capacity, because there's really kind of two spaces that you need to leave in the tank.

The first one is the bottoms, what are called the heels, because the pipe that you draw the volume out of is at the very bottom, and you've got to leave some space so that that pipe can maintain the suction.

And so you can't draw the very last bottle, the very last drop out of that tank, because you've got to maintain a little bit of volume so that that pipe can stay, stays wet. And so that's called, that suction line is called the heel of the tank up at the very top.

Quite often, some of these products, especially like gasoline, will have a tendency to evaporate. And so you'll see at the very top, some of these tanks will have a curve to them because you've got to allow for that evaporation. And so you can't use that very top.

And then the third piece that you'll use is what is called contingency space. And that's a little space that you leave there. For operational reasons, you might need to use more space in that tank because some process downstream might not be ready for the barrels coming out of this tank.

And so you need to use a little extra space in that tank. So once you've taken out the heel, you've taken out that unusable, let's call it that vapor space. And then you've taken out the contingency. What's left is what we call working storage. And that's the part of the storage that flexes up and down.

Now you will see that the average utilization of a tank is somewhere between 51% to 57%. And what's important to remember about that average utilization is that what's happening around that average is that that utilization is the amount of materially is flexing around it.

So the average might be, say, 55%, but what's also important is how many times is that tank cycling, or what is referred to as turning, turning over? And what's the range of those sites? What's the range of those swings? So you could average 55%, but on any given day, it could be as high as 90 or 95%.

And then it drops down to maybe down to the heels and then it's filling back up. Because that's how. Because that's how that tank has to flex in order to be absorbing material from coming upstream of that tank. It fills itself up and then it dumps it down into the process and it goes further downstream.

So the average isn't the only statistic you need to be looking at, to look at how well is that tank being utilized. Let's go to the next slide, because I think we're now going to step out of the refinery.

Oh, before we step out of the refinery, this kind of gives you an idea of the blending that goes on. So we've gone through all those refinery processes, and on the left hand side, we're going to have a number of storage tanks for each blending component for gasoline. So we've got that FCC gasoline. We've got reframe, hydrocrackate.

These are all the different blending stalks that came out of all those streams that came along through the refinery. And now we're going to run it through a blender, and we're going to make finished gasolines on the final side.

So each one of these gasolines, whether it's regular, carve off premium cargo, Bob Asbob, which is the reformulated gasoline around the Phoenix area, or the conventional gasoline for Arizona or Nevada, each one of those gasolines will have its own recipe, which means I'm going to draw different mixes out of those blending out of those blending components.

And so what I'm going to be. So what you're going to do is I need to make a batch of regular carve off. You're going to put the recipe in place, and you're going to draw out of those tanks on the left to make.

So you make on spec carbob, fill that carbob tank, then you go to the next product you're going to make, change the recipe and fill that tank up.

And so you need that flexibility on the left hand side so that you can make whatever you need on the right hand side, because different gasolines have different recipes in order to, you know, in order to be on spec. So now we've finished.

Now we've finished our product, or we've all but finished our product if it's an oxygenate. And now we're ready to move our product out of the refinery and start moving it towards start moving it towards the consumer.

So the first thing we're going to do is, as Neil was saying, is we're going to move it out on a pipeline. We move it out on pipelines. And there's two types of pipelines. There is a proprietary pipeline that could be owned by the refining company. And it owns, that's a pipeline that the refiner owns.

It comes out of their refinery and it goes to, and it goes, and it's a top and it goes to a terminal. So it's a connection that goes straight from their refinery to a terminal. Or it could be a common carrier like Kinder Morgan.

That's a pipeline where pipes come out of multiple refineries and it goes to a junction, joins up on Kinder Morgan, and then all of those volumes of move down the same line move down the same pipe, and they get dispatched into different terminals as they go down the line.

So if you're on a common carrier pipeline, you need to schedule your batches. And a refiner has a schedule, and it batches in the same way, gasoline, diesel, jet.

And so as a refiner schedules a batch, they will batch in, they will inject their gasoline, their diesel, their jet, the next refiner, then batches, gasoline, diesel, jet, and everybody has their schedule. If you miss your batch window, you have to wait until your next batch window.

That's part of the reason why you have those contingency spaces in those tanks inside the refinery is that if you miss your batch window, you need some contingency space so that you can wait until the next batch window comes around, and then you can, that you can dispatch into that common carrier pipeline.

Likewise, if you dispatched, if you've gone into the pipeline and the terminal you are heading to isn't ready for your material either, and it can't take the material, then you're going to need to find somebody else to take that volume. And that could be somebody, that could be somebody upstream of your terminal or downstream of your terminal.

But somewhere along that pipeline, you're going to need to find a buyer to take that terminal, to take that volume, because you will not be able to get off at your terminal for whatever reason. Whatever reason that you can't get off at that terminal. And that's going to be a spot sale.

That's an example of a spot sale where you're going to call up people, traders are going to call up other traders and say, you know, I can't get off at the terminal I was going to get off at.

And you're going to try and find somebody that has space at a terminal, and you'll make that transact, you'll make that deal, and they'll take that volume off your hands. And because of the scheduling, they'll know exactly when to go into that pipeline and pull material off the pipeline because they know exactly where your material is.

Because of the scheduling, because the scheduling is done so precisely. So we've gone down the pipeline, and now we've gone into the terminal. So you get into the terminal and there are different types of tenants inside the refine. Some of them are California refiners.

Some of them are refiners that have refineries outside of California, but they do marketing inside of California. Some of them are wholesalers. Some of them are commodity traders that are taking physical positions. And the tankage can work one of two ways.

You can lease tankage space, which means that's your proprietary tankage only your material will go into that tank. Or it can be community tankage. It's a gasoline tank and everybody's gasoline goes into that tank. That's why being on spec is so important.

So that if you're off spec and you go into a community tank, there's a risk that you spoil the tank. And now there's going to be some sort of mitigation for all the other gasoline that has now been thrown off specification. So you want to make sure that you're on spec when you get in there.

So now that we've gotten into this terminal, now we're ready. Now this is where, as Neil was saying earlier, now we're at the rack. So now what's going to happen is that you're going to get a truck that's going to go to, that's going to go to a rack. That rack is going to pull gasoline out of.

Out of these tanks. It's going to load up. Now if you're in California and you're making car Bob. So that truck is going to pull up, load up with car Bob, it's going to wheel around to another rack. That's where it's going to unload its ethanol. So now it's finished California gasoline.

And if it's going to be branded, then it likely goes to a. And that's where the branded additives are added in. And at that point that truck rolls out of the terminal and it starts heading to whatever retail stations it's going to make its deliveries to. So that's kind of how those two links work together.

And I'll pause there because the next slide is, are the slides for the pricing panel?

All right, thank you, Mister York. And I believe that's when you then hand it over to Mister Robinson, who's joining us from Robinson Oil. Thank you.

Feel so lonely down here. So my name is Tom Robinson. I'm the Chairman of Robinson Oil. We own and operate closer. Thank you. We own and operate 37 Rotten Robbie gas stations and convenience stores in the Greater Bay Area. We're a fourth generation California company. I'm a past President of SGMA and the past Chairman of NACS.

Both of those are national organizations that represent petroleum retailers or marketers and convenience operators. Also a past board Member of CFCA, maybe more importantly, I've also been 50 years in the industry.

With this background, I believe I have a fairly good working knowledge of the industry, both how the supply chain works and how pricing works in our segment of the industry.

I was interested in testifying today for the California Fuels And Convenience Alliance to possibly help you understand how these new laws and regulations will likely create artificial shortages and higher prices to consumers in California and neighboring states. Maybe we can talk about that in Q and A. We're a private brander. Our brand is Rotten Robbie.

We do not have any of the stations branded with the companies like Chevron or Shell or Valero or marathon. It's interesting, especially with that last presenter, the crude, the refinery, the pipeline. The terminal system is way more complicated than what we do.

What we do is we buy from many companies at their refinery terminals or at the outlying terminals. We buy from refiners or other suppliers in truckload quantities. We also ship gasoline that he also talked about through the pipeline system. So we also buy it in bulk through the Kinder Morgan pipeline system.

This requires having credit relationships with all of the various supplying companies. We deliver fuel to our stations on a 24/7 basis. We run our truck. We run our tanks on a keep full basis. We do most of our hauling with our trucks to be able to provide the quality of service so we don't run out of fuel.

Some locations won't be able to take a load at 10:00 in the morning, but by 06:00 in the evening they'll run out. Delivery windows can be narrow. Under normal situations things go fairly smoothly. But when there is some sort of supply issue and things are tight or there's allocations or there's outages, it's a challenge.

Petroleum products are commodities and commodity prices are frequently volatile. Maybe very dynamic is a better word to use. Prices change daily or more. So sometimes there can be a significant arbitrage opportunity at further away terminals if you have the truck time or the drivers.

We constantly monitor pricing and attempt to buy as well as we can while also fulfilling our contractual requirements. So our supply chain is usually pretty simple. Our dispatcher determines when a station needs fuel, dispatches our truck to the supplier with the best price and then is delivered to the station.

And we do this over and over every day.

Thank you.

All right. Thank you. All right. With that we're going to go ahead and pause to open it up. Remember questions that are of focused on the fuel production cycle and then we'll move on to kind of part B of the panel which we'll dig into the pricing and how that works. Questions Assembly Member Pellerin just looking at the.

Testimony from Neil Mahoney. He talks about there being 14 racks. In the State of California. Where are those located? I think he's on Zoom right.

They're all over the place.

Mister Mahoney, are you still there?

I am still here, yes. Somebody answered the question. They're all over the place. I unfortunately don't have a map that I could put up with all of them, but yes, they are spread throughout the state.

All right.

I can tell you where most of them are.

That'd be lovely. Mister Robinson? Yes, please.

You've got terminals at all the refineries. You've also then goes, the pipeline system goes down to Brisbane. It goes to San Francisco airport, although that wouldn't be a terminal deal. It goes over to Sacramento and up to Chico. So as far north as it goes to Chico, it also then continues to Reno and sparks.

That's the part that heads east. It goes south to Stockton and Bakersfield, San Jose, and then various terminals. There are also proprietary terminals. For example, in San Jose, there's a Kinder Morgan terminal, there's a Ahell terminal, and there's a Chevron terminal. Southern California, I don't know as well, but same type of thing.

You've got all the refinery terminals, and then it heads out east from that way out to Colton and some other terminals out there and then to Arizona. And I think that covers most of it.

And there is no pipeline from Southern California to Northern California?

No.

All right. Assemblymember Rubio.

Thank you, I have quite a few. First, one of the comments was that gasoline goes stale or it spoils. What does that mean? And what happens if it does spoil? Where does it go? I got it from the Professor's slides. Or if you know how to answer it.

Well, that's like not a problem. I mean, because it just, the system is going constantly. It's just constantly flushing the system. Your biggest problem probably is that can of gas that you have for your lawnmower that sits there for two years. And maybe that would be more problematic. The chances are that you're, I mean, it's important to keep it flowing, but it does. I mean, the system is constantly flushing stuff in and flushing stuff out.

So the constant in and out is what prevents it from spoiling. Because we use, because we use it.

We use it.

Okay. And then there's another comment about that. Each, the final product has to be certified. Who does a certification?

The refinery has a responsibility of keeping it on spec.

So in. But who checks the verification?

That is it in house.

So let me try to help. So does the in house person, the refinery, certify their own product, or does the state go in and certify the product?

I'll let somebody else answer that.

Yeah, I can answer that. The refiner does their own certification and then they're audited by somebody that is licensed by the state.

Do you know how often approved by the state. Do you know how often that happens?

How often are they audited?

Right. Is it, is it annually?

Yeah, annually.

And if there's a complaint, does, is there a complaint mechanism where you complain and somebody goes in and inspects it, or audits?

I don't know specifically for California, but I can tell you in Texas, there was a phone number on every pump. It says, you know, if you've got an issue, call this number. And it's a, it's an agency in Texas. I would imagine California has the same process, but I don't know that for certain.

Thank you. I think there's one more. Hold on. Oh, and of course, how many refineries did we have? 10 years ago you said, today we have 11 . I'm sorry,

Okay, I can tell you. I can tell you. 20 years ago we had 24.

Okay. 20 years ago. Okay, thank you.

Yeah, thank you. This is very interesting. I'm concerned about my lawnmower gasoline now, because I, and I never thought that that would be an issue. But I'm curious, and this goes back to, I guess, Mister Mahoney, or Doctor Mahoney.

You had in your notes there, you talked about the gasoline being sold in bulk on LA or San Francisco spot market. So those spot markets are for sale that are not going to be branded by the refinery. Is that correct or not? Help me understand that.

So across the country, there are typically at least a couple of different reporting agencies. The primary one in California is opus oil price information system. Platts is also another one that tracks prices. And they also track spot prices. And basically what they're doing is they're going out every day and finding out, did you make an offer?

Did you make a transaction? What were the transaction cost? And so then they can post a price that says, well, today the spot price in Northern California is this. This is price in Southern California. This is the price, you know, in Texas or whatever.

So it's an information system that's attempting to figure out exactly what the price is for those spot transactions. And that's not public, though I'm sure you could subscribe to it. The information is certainly out there.

We see what, we see what the spot prices are on a daily basis based upon what the information that they're able to get. So it's not a secret put it that way.

And first of all, and then just one other comment I didn't realize, but apparently a tank is not a tank. It is not a tank. So the utilization of different tanks for different fuel mixes and the inability to cross pollinate, so to speak, in some of those tanks is, is significant. Probably not a question. Maybe not a question you might answer.

It's not. But I tell you, the refinery is such a fascinating piece of equipment that is this piece of equipment and this piece of equipment and this piece of equipment and this piece of equipment. And it's just a gigantic distillery that has a lot of pressure and a lot of heat. It's a fascinating place. I wish I understood it better.

Mister York, did you want to comment on that?

No, other than to say, you're right, a tank is not a tank. There are different tanks have different purposes. Some tanks have to, if you repurpose it, they have to be steamed and cleaned. Some material can't be stored in some tanks, like butane has to be stored in a pressurized tank where FCC gasoline does not.

It can be stored in an atmospheric tank. So different materials have different requirements and then the tanks have to be, you know, you have to have an appropriate tank for the appropriate material.

Yes

I guess and just to follow up that, because we have a winter blend and a summer blend here in California, I'm going to guess that that adds to the complexity a little bit.

Oh yeah. Because what happens, and this is, I think, a really important part now, going from summer to winter is not a problem. You can, that, that's, the terminals won't get in trouble or no one will get in trouble if they, if they're selling summer blend in winter, you get into trouble if you're selling winter blend in summer. Okay. And that transition occurs depending upon Northern California, Southern California sometime in that October type of, excuse me, April timeframe.

And so what has to happen is those tenders that are getting shipped out of those refineries probably has to start moving a month or so before because they've got to flush the old stuff out so that the, in this case, the RVP, the reid vapor pressure, which is really the key thing for summer gasoline, meets the spec.

And so what that does is that that's one reason that inventories have to be so low during that period, because if you continue to carry winter gasoline, you know, you just can't get the blend down. So you want to get it down as Low as possible to be able to do it.

And so if there's a problem, at the same time you end up with a real problem. It just makes it more challenging. The winter. Going to winter is not the big deal. The biggest deal for the refiner is it costs more to make the summer gasoline than the winter gasoline. So they'd rather not waste their money on summer gasoline. They'd rather be able to switch over to winter gasoline. But anyway, that transition is easier.

Assemblymember Jackson.

Thank you very much, Madam Chair. Professor Mahoney, I was interested about the idea of, obviously, we know that we don't have the type of infrastructure enough to be able to rely on imported crude in terms of the sea transportation, in terms of the pipelines.

However, I mean, I'm interested in these, the idea of the usage of the racks that these sellers purchase from. I mean, obviously, I'm sure there's other states that have these type of racks as well. And how often or why aren't we, if we're nothing, incorporating or utilizing the racks of other states that might already have this supply.

Thank you. So you're completely right that because of pipeline infrastructure and because of constraints on shipping refined, it takes time, and there are limits on how much refined product can be brought into California quickly if there are supply shortages. I think you're also right to point out that I think this is what you're getting at, but you should correct me if I'm wrong that the inventories we have in state are the safeguard against supply shortages.

And I know we'll talk much more about that tomorrow, but I think to set the table, I think the question is, can increased inventories of refined product build a bridge between where we are when there's a shortage and when we can get product in from out of state or refineries can come back online and produce the product we need?

Right. Particularly if a refinery. I mean, I know there's some times where refineries have to shut down for emergency reasons in terms of things, but these planned ones, could California or should California be relying on or incorporating more other supply from other states instead of what we're doing right now? Could we be doing something different with the way we're supplying ourselves?

Again, I don't want to get too much into the conversation for tomorrow.

Oh, that's a tomorrow conversation.

But I do think there is a question about, just like a household might keep $400, $1,000 to tide over if there's a shock, can the State of California have the buffer in place so that we can build a bridge from whatever challenge we face to when a product can come back online.

Okay, thank you.

Thank you, Assembly Member Bennett.

Thank you very much. First question for Mister Robinson. You talked about the spot market, and they pull this all together. Those spot transactions are not regulated like the securities exchange, like the New York Stock Exchange. Everybody doesn't have to report. There's no regulation to make sure that there's no either...

People are intentionally leaving out some information, et cetera. That's an unregulated market from the standpoint of government oversight. Is that correct? Right. Okay, second question, and I think this is going to probably be for Mister York, but also Mister Robinson, if you want to weigh in the production.

Is there anything in the production constraints that would suggest that if there was some minimum inventory rule out there, but that minimum inventory rule made allowances for inventory drawdowns during the seasonal change. In other words, saying, hey, seasonally, we're going to allow the inventories to drop down because they have to, to make the transition over. Is there anything that we're overlooking that would say that would be a problem?

Yes.

What's that?

And I think your concern is finished gasoline. Okay, so it's, you know, refineries have lots of tanks, do lots of things, but really what you're talking about is why can't we have more tanks that have inventory? The challenge is where. Where are you going to put them? I mean, where are those tanks going to go?

No, sorry. My question is not that. My question is, if you take the current system that we have, but during the transition period from the winter blend to the summer blend, if we simply don't have the minimum inventory requirement, things would operate like they operate right now. Is that how you would see it?

Well, in other words, we made an exception. There's going to be a problem if you do this in the middle of July, or if you do this in the middle of January, but it's not going to be a problem if you do it during the seasonal blend time. If the CEC came up with those kind of rules, is there a production issue that we should be aware of?

I don't think so.

Thank you. I know we want. And then the final question I have is for Mister York and Mister York. You know, the heel capacity and the contingency space that's in the tanks.

I assume, based on the answer that Mister Robinson gave, that all that gasoline gets mixed again, it's not like we lose the heel and that sort of stays at the bottom permanently and quote, goes bad, like in your thing, but because it's all mixed in.

Mister Robinson, you could probably just answer that for us because it's all mixed in. All of it is available to become gasoline because of the mixing. Correct. Great. Thank you very much.

Thank you, Assembly Member Flora. Okay, Assembly Member Lee.

Thank you. This is for Professor Mahoney. Since in your slides you noted that most of California's crude oil comes from abroad, from, not from California State. We do, of course, still produce oil in the state. Does that mean the entirety of California oil? Sorry, California crude is produced for Californians then, or refined for Californians, you say?

I would have to pull up the latest numbers for you, but I think when you think about the crude oil market, it is a global market, and so prices are determined at the global level, and that input cost is affected by geopolitics, by events across the world.

Right. I just understand from the production standpoint, though, that we still do produce crude oil in California. And even though the majority of the refined oil, crude oil getting from abroad, I wonder, are we exhausting our supply of it or are we selling to other places? So if no one knows the answer right now, that's all right. My second answer...

Mister Lee, I can tell you it's very rare for California crude oil to leave the state.

Okay, very good. Thank you. And then my second question is, is there any single entity that understands the inventory or the capacity of all the tanks currently in the state? Because I understand from Professor, your presentation that there is a average per tank, but do we have an understanding what the capacity of all the tanks in the state capacity is at any given moment?

The EIA, which is the federal body that provides information, they track the capacity and the inventory levels at the state level. You know, as we've discussed, the situation in each tank is, you know, complicated, and that information is not publicly available.

But I think as we move into a conversation about inventory levels, it's important to remember that any minimum inventory level would not be having inventory levels outside of the range of what they're normally. It would just be saying that they wouldn't drop below a level.

So we're not thinking about extraordinary inventory levels, we're just thinking about keeping them within a normal range that we have a long history of doing.

Correct. Thank you. I just wanted to get clarification whether or not EIA or any entity was tracking what the current inventory at our state is. Okay, thank you.

Assemblymember Gipson.

Thank you very much. I want to thank the panel for your articulating some of the points and trying to clear up some things. I have Professor Mahoney, question for you. On your diagram he talks about, you talk about five refinery controls, 90%, 98% of the California grade refinery capacity.

And 11 refineries produced 90% of California gasoline and diesel. Can you, how many was before the, how many other refineries were down to five. How many more were there before? Five. And out of the 11, how many were before?

So the number has been decreasing over time. And that's not just the California story. Across the United States there's been a reduction in refineries and there's also been mergers and acquisitions which have increased the market power of refineries. I would have to get back to you on the exact numbers in California. I don't have them in front of me, but the trend has been towards fewer refineries and more concentration in the market.

Okay, but you can't give any specifics on why this is. I mean, they're just being bought out, are they? I'm talking about especially in California. And why are there so few in California? Well please, Mister Robinson, if you can articulate.

I think. I think the answer is there's currently 11. I think 20 years ago. There's 20. A number of. I'm sorry, I'm sorry, I'm sorry. Getting a little too casual here. Comfortable. A number of them. A number of them were just on the smaller side. Really what we've seen in the industry through the years is, yes, we've gotten rid of refineries, but usually the remaining refineries end up getting a little bit bigger. So we don't necessarily lose a lot of capacity.

Some of the refineries in California that have just been on the smaller side have just kind of gone away that they just were no longer economical. In particular, in the bay where there are five refineries, only three of them now produce gasoline.

And that really was a move because they made the decision they were going to go 100% to renewable diesel. And when they went to renewable diesel, they weren't making gasoline. So they felt that they were incentivized to go towards renewable diesel and not incentivized to make gasoline. Thank you is my guess.

Okay. Okay. Mister York, I have a question for you. In recent months, we have seen Chevron, one of the largest oil and gas companies by market rate, relocate their headquarters in California to Texas. After being in California for 145 years, it's a long time. Why is California unable to import refined oil from other surrounding states? What makes our blend different from theirs? And is there any way that we can make these blends compatible with each other.

So when you say oil, you mean crude oil or gasoline? Crude oil. Crude oil. Well, you do bring oil in from Alaska, but outside of that, it's an infrastructure issue. There's no crude oil pipelines coming into California. If you wanted to bring crude oil in, you'd have to do it by rail. And that's just very expensive.

There have been a couple of crude oil terminals built in California, but they're just not economic. So that's why you don't see crude oil being railed in to California.

Okay, can I add to that? Can I add to that?

Sure. Through the chair. I have no problem with it.

I was just. Please. I was going to say a large portion of the crude oil comes in on tankers. I mean, we use the California crude, but then we bring in a lot more crude, whether it's from Alaska or, you know, a lot of different places. So crude oil is.

Comes in, is a significant piece of the refinery. Crude oil mix, imported crude, excuse me. From the standpoint of finished products, we can also bring in finished products. And we do bring in finished products. It's just more problematic to be able to do.

And you got to make sure that you got the infrastructure, the wharf system and the pipeline system and all that kind of stuff. You know, for example, in the eastern part of the United States or the northeast part of the states, they have no refineries. They're totally sourced by pipelines and barges and things like that.

So you don't have to have a refinery as long as somebody can make the product and get it to you. But you got to have the infrastructure here to offload it and then you could distribute it.

Great. One final question, Chairman Robinson. What do you think? How do we fix this problem in your mind?

I don't think you can. I think that all you can do is make it worse is one person's humble opinion. But I. If you step back and understand the motivations of all of the players in the industry, they're working every day to make the system work well.

Just stuff happens, and as we get, as we, you know, as things transition, it makes it a little bit more fragile of a system. But I don't really think that expecting somebody from outside the industry to be able to come up with a better solution, I personally would be very, very surprised.

But you're in. You're part of it, right? And so not someone from the outside trying to offer solutions for those who are inside. You're inside, and so your solution is...

I think it works pretty well. It doesn't... we end up with price spikes, there's no doubt about that. And we end up with some outages, we end up with some problems. But there's generally in those situations, there's profit incentives to solve them as quickly as you can.

And then with the competition that we have, usually it sort of settles back down relatively quickly. In other words, the system. The system really works. It's fascinating that here we have in California, we're constantly at least a dollar more expensive than every place else in the country. Okay. And at the same time.

But is that right?

Well, it's there. I question, we are also the most activist state as far as inserting ourselves into the industry. And I'm just questioning if there's not a correlation between that and the high prices we pay. I'm not really questioning it, but I'm just sort of. I have an opinion. I have a soapbox. Sorry.

Thank you.

So just really quickly, it seems like with the spot market and the like, there isn't a lot of fuel sitting around at any one time. Fair to say, Mister Robinson.

No, no, no.

It goes out as fast as it comes in. It is spoken for when it gets to the racks. And if it's not, you've got a spot market to provide for that. Do I understand that right?

Yes. Yes.

Okay, so my question is this. You've been around a long time. I know. I heard five decades. You started when you were six. I did the math.

But my question is, in your exposure to the market, is there additional capacity that currently exists to keep more fuel on hand, more refined fuel, so that we may not have these spikes that seem to have happened?

I sincerely doubt it. I know at the retail, I mean, as we remodel or build stations, we put in bigger tanks, so it gives us a little bit more, you know, room, you know, for problems to occur. I can only assume that it would be advantageous for, you know, other people to do it at the terminal level. And the fact that they don't makes me believe that it's really not there.

So do any of our other witnesses want to chime in on that? Mister York or...

If I may. So private sector firms have an incentive and obligation to earn a profit. And so their decisions about how much to store for a rainy day are determined by profit incentives and in particular holding on to additional product. So you can sell it when prices are high and drive down prices can cannibalize the money you're already making during that period.

Now, my view is when we have a price spike that a responsible system would have product on hand, would have anticipated the potential of there being a refinery turnaround, a refinery outage, something else, and that product could be deployed to bridges, to the point where the refinery came online or where a product could come in from overseas.

That decision may not be the profit maximizing decision for firms that are trying to make the most possible money, but in terms of serving the California people by preventing budget busting price spikes, I think that is something that would be desirable.

All right. Thank you, Assemblymember Zbur.

So one of the questions is sort of a follow up, I think, to my colleague from Carson.

So in the, the report that was part of what we were provided, the transportation fuels assessment, that was issued by the Governor's Office in August, on page 15, there's a graphic that shows the nine remaining refineries, and it looks like there's four that closed since 2006.

Were there other refineries when we go back to 20 years, that looks like about 20 years, it's 18. Were there seven or eight refineries that closed between 2004 and 2006 that are not on this chart, or were those just so small that they would not have been on the chart? I'm just trying to reconcile those.

And I don't know if anyone can answer that. No, I can't. Maybe we'll wait until we have folks from the CEC. Second question, which is a quick one, and that's on Mister York's slide, the one that says that has a graphic showing gasoline blending tankage.

Is it, when you look at that graphic, there's a column that has final product, and it shows, you know, regular CARBOB, premium CARBOB, Arizona in order to have inventory that would be available during a price spike, would you, are all these being stored in separate tanks once it's refined, once it's blended?

Yes, they are. Yes, they are, because they all have different specifications in order to be sold.

So is it an accurate question to understand whether there's excess capacity in these different tank configurations, to understand whether or not there would be inventory available for a period of a price spike, essentially, where refining capacity is, is below demand?

Are you meaning, like, could there be excess capacity in the Arizona conventional tanks, or are you asking.

Yeah, I want to get into the Governor's proposal, but one of the components of the proposal is actually looking at whether or not there should be minimum inventories. And so are we talking about minimum inventories in refined product? Is that is one of the questions we should be asking, whether or not, there's excess capacity in the tank infrastructure for each of these refined categories of product.

I think I. Let me see if I. Let me say by. Let me see if this answers your question. I think if you're going to look at minimum inventories for California fuels, the only tank capacity, you can look at the tank capacity for CARBOB fuels, you would have to exclude tanks that are used for Arizona BOBS and for the Arizona Nevada fuels, because those materials could not be used to fuel California to meet California fuel standards.

Okay, so is there separate tanks? Yeah, I guess a good question. Is there separate tank capacity for regular CARBOB, or that that is held for periods of time, or are we using storage capacity for different categories of fuel, and you're sort of using it all up and then it's basically being converted to another.

They would be dedicated tanks. It would be a CARBOB tank. A regular CARBOB tank, or a premium CARBOB tank that you would fill up and drain as you're fulfilling regular CARBOB demand or premium CARBOB. Demand. And your Arizona conventional tank would be sitting over there. And it's a function of how much Arizona demand is there for your. How much demand is there for in Arizona or Nevada pure conventional gasoline.

So it would be a fair question to be asking about whether or not there's excess tank capacity for California regular CARBOB. For California premium CARBOB. Is that. Is that.

Yeah. And then exclude the other grades.

Thank you.

Mister Jim Patterson or Joe Patterson. Sorry, I. Sorry. Get my Pattersons...

It was bound to happen. So I know. Look, we're going to have a lot of time to talk about the governor's proposal, and that's not the purpose of this. But we can't forget we are in special session because the Governor called it to make a proposal, and this is laying the groundwork for that.

And so, I won't go too far down the rabbit hole. But obviously, I've learned a lot about the complexities of. Well, learned a little bit about the complexities of making gasoline. And it's obviously very complicated. But I have a question for Mister Mahoney, is, you know, we've gone from something like 24 refiners to 11 in the last couple of decades.

And it seems to me that, you know, if, if there was such profit in the industry and such, just so much money and billions of billions of dollars to be had by people, why we would go from 24 refiners to 11 in 20 years, because it seems like a bad idea to close your business if you're making billions of dollars. And I guess the question is how exactly aside from that, how would having a minimum inventory help keep those 11 refiners in business?

So again, I want to try and answer your question without getting too far down the rabbit hole. As you said, I think the problem that this proposal is trying to solve is the massive price spikes like we saw in September 2023. We saw in 2022. And those spikes occurred because refineries went offline for planned or perhaps for unplanned maintenance and there wasn't a buffer stock available to fill in for that product while we waited for product to come in from overseas.

And so if you think about that problem, the spike in gas, which gets families to think twice about going on a Labor Day road trip, that puts pressure or people looking for couch money to pay for a tank of gas, if that's the problem you're trying to solve, then I think that's the frame you want to be thinking about when you're thinking about how can we make sure that we have a bridge of supply so we can get through whatever disruption we face.

There's a separate conversation about managing the energy transition in California and making sure that we have enough refineries to have continued production while we shift to more electrification in our economy. But I think keeping those two points somewhat distinct is at least helpful for me when I think about what problem this solution is trying to address.

Well, it seems like we're going to be spending a lot of time together over the next couple of weeks. And so whenever it's appropriate to answer the question on how keeping minimum inventory is, because you suggested it multiple times and I probably heard it 10 times in your presentation, how that helps keep the 11 that we currently have.

That's really what I want to get to at the end of the day because I think we can agree we can't lose any more capacity. And so to the extent that these minimum in the production cycle that the minimum levels that you want to main... that you think is necessary will help maintain those 11 refiners, whenever you're ready to answer that, when appropriate, I'll be here.

Fantastic. I look forward to that conversation.

All right. And I do know that there were a couple of folks who wanted to ask some follow ups related to the production cycle. What I do want to do because I think that was a good transition into a conversation about pricing and how pricing is set is if we can pause on those and you'll be the first folks that we call on. On our second lap, we have the same panelists.

So we can, you can ask whatever question you want after we have a chance to talk about pricing, because I think we're starting to get into some of those questions as well. So with that, let's go ahead and Mister Mahoney, talk us through. Who are the market actors? How do gas prices get set? How does this all work? Explain the spot market to us.

Great. I will go first and then just thrilled to have other deeply knowledgeable Members to also share their perspective. So if possible, I would like to jump to slide four in my slide presentation.

Great. So when I teach pricing to my students, when I think about markets, I think about two components of pricing. One is sort of the costs of production, and the second is the markup on those costs, which reflects market power of the firms and demand conditions in the market.

And so what I'm going to do, and I was instructed to take no more than five minutes, and hopefully I will follow those guidelines, is to talk a little bit about pricing, first in the upstream market, which is where refineries or refining product and setting prices, and then talk a little bit about the downstream market, where gas stations are buying the refined product and then setting prices for consumers.

So this slide is about the upstream part of the market. And if you think about a refinery, it has inputs, so it's buying crude both from California producers and on the global market, and a number of other inputs. And then it has to pay, obviously, the costs of operating the refinery.

So those are those input costs into sort of the refiner's production function. And then the second thing it has to do is transport that product to the rack. And we've already talked about the network of pipelines and the sequencing of different types of refined products.

This product is transported to the rack, and the rack price that is quoted in public sources. We talked about OPUS, which is my go-to source of price information. Those prices. At that point, we haven't yet included the taxes or the environmental credits. Sometimes compliance costs are included, sometimes they're not.

Those are the input costs at that stage. There's one other complication, which is more prevalent in the California market, which is we have these vertically integrated refiners to gas stations. And so Chevron, I think, would be the most well known example where there's a company that owns the multiple stages of production in those settings.

The company, like Chevron, is also going to be controlling pricing on the transportation of product from the rack to the gas station. And this is known as DTW, or dealer tank wagons, and they're charging the gas station for that last mile delivery. So that's the cost component.

And then, as I teach my students, prices not only reflect costs, but they reflect the market power of firms to charge something beyond the prices of margin. In the upstream sector in California, there are three sources of market power. One is the available refining capacity. There are five companies that do the refining.

If one of them went offline, or if some of its refineries went offline, there would be fewer suppliers. And if you're a buyer and there's fewer suppliers, you're going to face higher prices. So that's .1.2 is inventories.

If we are running out of inventories, we're getting close to the tank heel that skip taught us about, then there's little opportunity for supply from inventory to meet demand. And so that means the people who have product, can produce product, have more market power. So inventories, blunt pricing power.

And the third thing, and we've already talked about it in a robust nature, so I won't belabor it, but it's out of state supply. When it is easier to bring in product from out of state, the in-state refineries will have less pricing power.

But when it takes time, and it always takes time when there's been slowdowns in the Panama Canal because of low water levels. And that means it takes longer for product to get from us, the Gulf Coast or Europe. That again, fewer outside suppliers, less of what economists know call a competitive fringe.

That means that again, in-state suppliers have more market power. So those are the mix of forces, costs and market power, which determine the prices either at the rack or the price that the vertically integrated gas stations pay at the gas station.

And then if we can flip to the next slide, talk about the downstream component from a retailer's perspective, and I know my colleagues will spend more time talking about this, the prices they pay depend upon the pricing at the rack, and that is buying the product. The ethanol and the additives is all blended together.

It's the last mile transfer costs, including dealer, tank, wagon. And then there's obviously a set of taxes at the federal, state and local level, which are passed on to consumers. So those are the input costs, some sense for a gas station.

And one thing to note, and we can spend more time on this, though it is, I think, opaque, at least in public information, is that these branded vertically integrated retailers have very complex contracts with the upstream refiners. Those contracts determine the price, they determine the minimum quantity, sometimes the maximum quantity that gas stations can purchase.

And something my colleague Severin Borenstein has documented and may have shared with this body in California, branded gas stations have much higher prices than non branded gas stations.

I think there's an emerging set of evidence which suggests that may be due in part to these complicated contracts which affect the prices that branded gas stations are paying for product. One last thing, and then I'll turn over the floor, is retail prices. So the price is that you or I pay at the pump.

Exhibit a well known phenomenon called rockets and feathers. Economists are typically bad with words, but this is one case where I think we actually have an apt description of the phenomenon. And the rockets and feathers phenomenon is when there's a increase in costs, the price of the pump shoots up like a rock.

But when there's a decline in costs, prices don't immediately revert back to their standard level. They fall slowly. They float down like a feather.

The implication of this is when we see shocks to the underlying cost, consumers are going to pay more immediately, but then it's going to take a long time for those prices to come back down. And that's going to mean an extended period of time when consumers are feeling a pinch at the gas station.

So I'm sure you will have great questions like you did after the previous session. But for now, I do want to turn over, I guess, the conversation to either skip or to the other speaker.

Thank you. Thank you, Professor. Yeah, we'll go ahead and turn to Mister York. You had some slides on pricing that are also included in the members' binders. So whenever you're ready.

Okay. Yeah, I wasn't exactly sure what the Committee wanted to hear about prices. So I'm going to talk a little bit about crude prices and then a couple of observations on product prices. If we could go to the first slide. This slide just kind of shows that different crude oils will have different prices.

And it's largely driven by the differences in the qualities. And broadly speaking, the heavier the crude and the more sulfur in the crude, the more difficult it is to refine. So the lower the price.

So you kind of see that San Joaquin Valley crude, it's very heavy, it has a low specific graph, it has a, a Low API, has a higher sulfur content, sells for a lower price than what we call a light, sweet brood like Brent. And part of the reason is it tends to be more expensive to process.

And it's more expensive in two ways. It has a higher operating cost because you tend to need more heat and more hydrogen and more energy. And it also tends to be more expensive because you have to put capital investments in place to handle that, that heavier crude.

So different crudes will have different prices, even though there is a global crude market. We go to the next slide, you could have two crudes that are exactly the same. And from a refiner's perspective, they will have different prices because they come from different locations. And so they'll have different transportation costs.

And so, just to give you an idea of the order of magnitude, if a crude is coming into California, if it's coming from the San Joaquin Valley by pipeline, it costs about a dollar if it's coming from Brazil, it will cost about $4 to $5. If it's coming from Alaska, it's about $5.

Now, you might be asking yourself, why would a crude cost dollar five from Alaska, but only $4 from Brazil, when Brazil is so much farther away than Alaska? And that's the effect of what are called Jones Act tankers.

Brood that comes from a US port or any material that goes from a US port to another US port must sail on what's called a Jones Act tanker, which is a US flag, US manufactured, and US crewed vessel. And those are just more expensive vessels than international flag vessels.

And you kind of see that's the difference in the cost between Brazil and Alaska is that kind of shows you the impact of a Jones Act vessel. And then if we're coming from the Middle East, you're kind of looking more like $6 a barrel because it's farther away.

So even if the crudes are exactly the same, the closer the crude is, the more attractive it is to a refiner. So then you would say to yourself, well, San Joaquin Valley is very cheap crude, and it's very cheap to transport it. Why doesn't everybody refine San Joaquin Valley crude? And that's because.

Let's go to the next slide. Is your refinery configured? It goes back to the, did you make the capital investments to refine this crude and get the most value for it? And refiners will maximize the value of the entire barrel of the crude. They don't look at just one product.

So there's a concept called the gross product worth, which is you take how much you're going to make of each product, the yield of that barrel times the price of that product, and that's your gross product worth. You subtract off your crude cost, and you subtract off the operating cost for that crude.

And what you're searching for is where is that margin the highest? And that's the product mix and the crude slate that you're looking for. So not every refinery will pick the exact same crude because they don't all have the exact same processing equipment. So that's kind of just a quick overview of crude prices.

If we can skip two charts. Let's go really quickly, just to talk really quickly about product prices or just on product sales. A refiner's first obligation is to fill their contractual, is to fill their contracts. And that's where the vast majority of the volume goes. Then they have some volume, discretionary volume.

That's left over and there's really two channels that that could go, that the discretionary volume can go. It can go into bulk sales, which would be things like Costco or unbranded distributors, or it could go into the spot market. So the bulk sales tend to be bigger than spot markets.

Spot markets tend to be, they are one time transactions. They tend to be smaller volume transactions than bulk sales. And they tend to be higher risks than the bulk sales, because they're higher risk on both sides. The buyer comes into the market, he doesn't know if there's a refiner that has volume to sell.

Refiner comes to the market, doesn't know if there's a buyer for that volume and the volumes.

Then because of the contractual volumes on the left hand side and the bulk sales in the middle, spot market volume sales are actually a very small part of all of the volume that gets sold in the market, in the refiners and the wholesale marketing as you're heading towards final demand.

So that's really kind of all I wanted to kind of talk about on pricing in a moment. Probably uncover a lot more things when we get into the questions.

Thanks. Mister York and Mister Robinson. Talk us through how does pricing work at the retail side. Okay.

Okay. Well, I'm the person responsible at our company for doing the pricing, the gasoline, diesel, for our company operated locations. And it's something that we do on a seven day a week basis. And so how do I do it? I basically look at four things every day. I look at four things.

First off, first and foremost, I look at price surveys to find out what competitors are doing. Second thing is I monitor sales trends to find out if we're selling more gallons of fuel versus last week versus last year. The third thing I do is I monitor wholesale prices and whether they are trending up or they're trending down.

And then lastly, I review the gross profit margins of each of our individual locations. And so when I'm all done with that, after reviewing that stuff, I make the decision of either to raise the price, lower the price, or leave it the same.

And I assume that most other retailers more or less go through a somewhat similar process when they set their own prices. I think it's important to note that as a general rule, as a general rule, retailers are like consumers in that we do better when prices are going down, not when prices are going up.

It's important to remember that we do attempt to be a for-profit company because our employees want to be paid wages and bonuses and bankers and fuel suppliers and landlords and other vendors all want to be paid and neighbors want us to maintain our facilities so the we don't make the neighborhood look bad.

And more importantly, governments always want us to pay taxes. So it's important that we're a for profit company. An adequate gross profit margin is important because California has such high costs, many of which are unique to California.

A short list of costs which impact our pricing and our profitability are high state excise taxes, state greenhouse gas and low carbon fuel standard fees, special California fuel specs, sales taxes that vary from city to city or county to county.

Vapor recovery and enhanced vapor recovery equipment maintenance and testing, other types of monitoring, testing, high minimum wage, high utility bills, high insurance. And then it's important if you happen to be building something.

We have certainly have high land cost and slow and very expensive permitting, not to mention CEQA. The new laws and regulations the state is implementing, which is going to run the industry more cost-effectively. And I say that facetiously, will almost certainly be an additional cost.

California already has extremely high costs to operate, which means California's consumers pay very high prices for gas and diesel. And now the bill they foot will be likely bigger. That's in a nutshell.

All right, thank you. All right, questions. We'll start with Mister Bennett and then Mister Gibson.

Thank you, Chairwoman. And I'm going to have to combine my questions from the last session and this session. I've been trying to keep my questions very tight because I know you're trying to fight time. So my apologies. Just take a little bit more time. But my questions are for Professor Mahoney.

So if you could queue yourself up, and while you're coming up, I would say we heard from Mister York that the first obligation of the companies is to meet their contracts. And I would counter that the first obligation of the companies is to meet the demands and interest of their stockholders. And that's why they're profit motive companies.

And it's very appropriate for them to try to maximize their profits. But for Mister Mahoney, are you there yet? Love to pull you up for this particular question. And that is that the companies today are able to keep nine day, 12 day, 15 days worth of inventory. Is that correct, Mister Mahoney, from what you understand?

That is correct.

And as you stated, the decision, while it's a complicated decision, lots of things can influence it, but their primary focus in that decision is what's going to be best for their profits. They don't want to hold inventories and have that storage cost and all of that, if unnecessarily.

But if they can hold inventory because they think down the road they could be able to sell into a higher priced market, they may make those decisions, but the decision basically on inventory, or one of the primary things is simply their profits, correct?

That is correct. Member Bennett, these companies have an obligation to maximize profits for their shareholders.

You do so much better when you're on the screen rather than just hearing your voice. So good to see you. But today, they are sometimes maintaining as much as 15 days worth of inventory, and other times 12 days, and other times down to nine days. Is that correct?

That's correct. There's a range of inventory holdings that they have sometimes sufficient, sometimes perhaps insufficient. Great.

And so the issue, the fundamental issue in front of us today, we had the question about, hey, is there a lot of excess capacity out there? And the answer was no, there's not a lot of excess storage capacity out there.

But the fundamental question that we're asking here is not do they have to come up with a lot of excess new storage? But can they simply find ways to operate so that they stay closer to the 15 day inventory level than the nine day inventory level? Is that correct?

That is exactly correct. I think the policy is not for them to go above and beyond what they do normally, but just to make sure that they don't go very low.

So I think that's really an important point for us to try to emphasize here, because I've had numerous conversations and lots of people talking about how expensive it will be to build more, et cetera. And what your contention is if they stay closer to the 15 days, then we're less likely to have price spikes, correct?

That is exactly correct.

So if we add to the decision making process that besides their profit motive, there is also the public's interest in trying to keep those inventory levels closer to 15 days.

If we combine those two, we would have, in the long run, a better public policy, and we're not certain what the impact necessarily be on profits, but it certainly doesn't seem like that would destroy profits because they're already doing that for a significant period of time during the year, correct? That is correct. Good.

And so I want to go to the second thing, which is my colleague saying the goal is to try to keep 11 refineries out there operating. My understanding is refineries don't operate very cost effectively when they're operating at 50 or 60% capacity. Refineries operate most. They need to be at high capacity, close to full capacity.

So would it be in the public's best interest to have, as demand drops, let's say demand drops 50% over the next 10 years, would it be in the public's best interest to have 11 refineries operating at 50% capacity?

Or would it be better to decrease the number of refineries as a demand drop so that they can operate with economies of scale at higher efficiency levels?

It would be better for the refineries to operate at minimum efficient scale, that is, at higher capacity.

So we will almost inevitably, as demand drops, see a decrease in the number of refineries, correct?

That is correct.

So, and pardon me, but now I'm on. Those are the questions that came from before that I wanted to try to counter. So, Mister Professor, do inventory levels affect spot prices?

Do inventory levels affect spot prices? They do affect spot prices.

Mister Robinson also shook his head here, right? In agreement. So I'll move on from there. And then you also said, higher inventory, blunt pricing power, correct? That is correct.

So if inventory, if higher inventories affect spot prices, and I, higher inventories, blunt pricing power, then if we added to the discussion about how much inventory should be maintained, it would be in the public's interest to say, where possible, without undue expense, the industry, if they normally are keeping 15, or if they oftentimes can keep 15 days, the more often they do that, the more likely we would not have spot prices artificially jump up as a result of Low inventories, correct, Professor?

That is correct. That is correct. So, if I could then jump over to this. So, right now, we have an unregulated spot market. And my understanding from reading the CEC document is the unregulated spot market.

Although it's a small volume, many contracts are based on the spot price, so that the spot price has an outside outsized influence on the price of gasoline in California. Is that correct?

That is correct.

And so, I want to come to the final thing on your last slide. You make two points. You make the point that the brand versus non brand price gap is larger in California than most states, because you say, possibly reflecting the features of these contracts. But is this.

So in other words, what you're saying is, in other states, the difference between a brand price and a non brand price is a certain gap, and in California, that gap is much narrower. So we don't have the non brand price having as much of a moderating influence on higher prices. Is that correct?

That is correct.

And is there anything that you know of, based on our quote, the thing that's always cited for our higher prices, that's as higher regulations, all of that. But those things shouldn't be affecting the differential between the band price, the brand price and the non brand price in any significant way, should they?

No, they should not.

So has the industry offered any explanation as to why there is a less of a gap between the ban price and non banned price here in California?

I'm not aware of an explanation for why.

Thank you. If there is one, I would be happy to hear it from the industry. Again, I recognize the industry has an obligation to maximize profits. We have an obligation to also try to maximize what's in the interest of the public.

And then the final thing you talked about, retail prices go up like a rocket and down like a feather, right? When costs go up, retail prices go up very quickly. When costs come down, they don't go come down very quickly.

That seems to indicate that pricing power is taking place, because in a pure market, in a free market, with competitive markets and proper information, the price should go down just as fast as it went up in normal economic analysis. Is that correct, Professor?

That is correct. This is a hallmark of market power.

That's a hallmark of market power. And in this situation in California, we have two situations that don't seem to be related to California's taxes, to California's environmental regulations, or anything else. They seem to be related to how much pricing power the remaining refineries have. Is that your analysis?

That is my analysis of the California market.

Thank you very much. And thank you, Chair, for letting me go on.

Thank you, Mister Bennett. And actually, I want to ask just a couple of follow up questions related to the spot market. So as you highlighted, and I think Mister Bennett's questions highlighted, there's sort of two things about the spot market. Number one, it's incredibly opaque and seemingly not very well understood.

And number two, there's a very small number of transactions that are moving through the spot market, which then have an outsized impact on overall pricing in the market. So it strikes me that that is very problematic and subject to gaming. Is that an accurate conclusion?

I'm not sure if the question was for me, yes, I think, I do not know of smoking gun evidence of gaming in this market, but it would be something that I would be significantly concerned about given that a small amount of contracts can determine prices in a broader market.

And can you explain to us a little bit about who plays a role in the spot market and who are the traders and the participants in that market?

My visibility, as you said, this market is opaque. And the visibility I have with publicly available data is limited, so I don't want to speculate in this forum.

Okay. And I guess, lastly, is there anything that we can do about it, either to get more visibility into what might be going on, or to somehow intervene to make that a more transparent market with what seems like better oversight?

I'm of the view that, you know, bright light is the strongest disinfectant. And so I think the policies that have been put in place to provide more information, I think are exactly the right things that we should be doing.

And I know the speakers from the CEC will be able to tell you more about exactly that line of policy work.

Okay. And then, Mister York, any comments or thoughts on the spot market issues with the spot market, and options for us to address some of those issues?

Is Mister York, are you still available?

Oh, I'm still here. Could you repeat the question I was.

Asking Mister Mahoney a couple of questions about the spot market, which I think a number of us are trying to understand more fully. It seems incredibly opaque. And there's a very small number of transactions that are moving through the spot market, which then play an outsized influence on pricing and the overall market.

Can you help us understand, I guess, who's involved in those transactions? Is there a mechanism by which we get more transparency into those transactions and the market movers?

Because it feels like in a world where Professor Mahoney doesn't even really, who's an expert in this area, doesn't even really know who, who the players are or who's making the trades. That seems very strange.

Well, I think the participants are going to be sort of like the same, the same people who have that storage terminals. It's going to be the refiners, marketers, wholesalers, traders that hold physical positions. How active, if you sort of drew a pie chart of them, I don't think that's.

I don't know how you know what percentage of those participants are active in the spot market. I think you're kind of asking, when you think about it, if you think about a spot market, you'd sort of say the exact same thing about the stock market. When the stock markets got a lot of trading that goes on.

But we don't actually know exactly who made every single trade. We just know at the end of the day, a lot of shares were traded. And we do know when some positions were traded because the SEC does have some training rules. But I think it's just a structure of how the CTFC hasn't defined the rules for it.

For more transparency and as to why, I don't know.

I might be able to help you. I might be able to help you on that. Sure. So if we went back to Simon's Bennett's question about inventory levels. Yes, it's better if you have inventory. Refiners every day have sales that are going out. Sales are going out every day.

And so the problem they have that bought their inventories, all of a sudden their equipment breaks and they can't fill it, but they have sales. And so then what happens is they go into the spot market and as soon as they go into the spot market, they're dead meat.

I mean, they're, they, you know, if I have it and you want it, you're going to have to pay what, what I want to charge you so that's the challenge. Now, as far as. As far as the illiquidity and the opaqueness, it's not so opaque. That's not the big issue. The big issue really is the illiquidity.

It's just not a very liquid market. I look at it every day in the sense of the reports and many days there's no bids, there's no ass. That happens. It's not like the Merc or something like that. That's got lots and lots and lots of transactions. That doesn't have lots of transactions.

There is an issue with the illiquidity, no doubt about that. The opaqueness isn't quite as big of an issue in my opinion. The gaming of the thing is an important thing. And it could occur. It could occur.

But it's important to recognize that if you're going to have to buy again, you're going to want to make sure that the prices aren't high because that hurts you.

And so to a certain extent, the parties sort of clean up the system amongst themselves because they want to make sure that the information is correct because somebody's benefiting and somebody's paying. And so that balance does help the gaming issue. But anytime you have a more illiquid market, you have more opportunity for shenanigans. Not that they're.

Yeah, understood. And I think that was a great explanation, that by virtue of the fact that there has to be a buyer and a seller, there's some natural tension there. I think what is confusing to me is the fact that you have this very small snapshot.

Like, it's not the fact that this spot market exists, it's the fact that then there are contractual links for other pricing. So that it uses the spot market trigger, if I understand correctly, to inform other pricing, which that part seems very strange to me and very unique.

It's an interesting situation and it's a certain amount of frustration from my standpoint, because we buy in the bulk market and we don't happen to go out every day and make a transaction. We take whatever the market is. And so we're, we're basically, we buy it based upon what the postings are.

There's a lot of product that does move through that system. So you end up with relatively few fueled, few trades, impacting a fair amount of sales. That certainly is an issue. And what, what you can end up with is you can end up with sort of weird little jumps that tend to clean themselves up fairly quickly.

Because there again, you know, there's somebody that's getting helped and there's somebody who's getting hurt and it usually gets cleaned up, but it does get a little messy for a while.

All right, thank you. Technical term. We'll go to it. Mister Gibson.

Thank you very much. Mister Robinson, how has the volatility of the pricing impacted your industry? As we know that there are many independent mom and pop gasoline stations in the state. And I'm wondering, has there been any of those stores shut down due to the increase of prices of gas and thus increased operating costs from your perspective?

And I'll. Yeah, can you share?

Yeah, I mean, you could sort of go down the street and you can see where some stuff got closed for one reason or another. It's, our industry is pretty interesting in the sense that it's incredibly fragmented. I mean, there are so many different players out there.

It's not just like Chevron that does all the pricing or runs everything.

I think that what happens with the volatility is people are probably more conservative because they know they've got to, they might be paying a lot more for the next load that comes in, or the prices are going down and they got to get rid of that old inventory that's a lot more expensive.

But I do know from a national standpoint, the numbers have gone down, but I can't tell you exactly how many.

Okay, that's fine. California. So Professor Mahoney's diagram talks about the 11 refineries. And that's what I talked about before and what I heard from my colleague that there looks like it's going to be evolution of these 11 refineries decreasing over a particular period of time.

And so those mom and pops that I made mention these 11 refineries, that was more before, those are jobs associated with those particular indices. And so I'm trying to, and I heard public interest, that's the word I heard used, public interest.

Isn't those employees who work there, aren't they part of the public and the interests of the public? And so how do, in your opinion, how do we make sure that one, those employees continue to maintain their jobs? Because I don't think know that California has an issue in terms of the unhoused and homelessness.

And if a person can't take care and provide a roof over their family's head and their head, then where will those individuals go, right? And so that's all associated with being able to, one, take care of the house, the vehicle, the food, etcetera.

And as I'm hearing a decrease in nutrition in terms of these jobs, what happens to those individuals in addition to that? And maybe Mister York can articulate how much does this industry provides overall to the California economy to make it the fifth largest economy in the world. Because we all have bragging rights.

We all talk about it and I brag about it amongst other states and things of that nature. We are very envious by other states because we can say we are the fifth largest economy and we say that based on facts. So what and how much does this industry contribute to the livelihood of the people who work there?

And also California's economy to be the fifth largest economy in the world. So can someone articulate that for me?

You had a lot of stuff in there.

I have more. zero, I'm sorry then no please. I'm waiting for an answer.

I think from the standpoint of any industry, whether it's our industry, any industry, I think it's really important that the state looks and questions whether the requirements and the regulations that they're putting on are necessary or are they burdensome, in which case you know, they're costly and it makes it more difficult for especially the weaker players to survive.

So I, I guess my question is whether you know, is the burdensome nature of regulation or laws is, can be certainly important in the, in the livelihood of small businesses. Mister York.

Yeah, so I can already. Let me sort of add when you're talking about the evolution that's already happening in that we don't have 11 refineries, we have nine because one went.

I'm sorry, what happened?

Mister York? We've just lost your sound.

Hello.

You're back.

Am I back? Okay, so when you're talking about the evolution of the refineries, it's already happening. We don't have 11 refineries. We have nine. Nine fuels refineries. We have Marathon Martinez converted to renewable diesel in 2023 and Phillips 66 converted to renewable diesel in 2024.

Now from an employment standpoint, I don't know what the employment count is for renewable diesel plant, but I can tell you when most refineries close, they convert to a terminal and the headcount there is that is about an 80% reduction in headcount.

So whatever the refinery was, the terminal uses about 20% of the people that the refinery did. The renewable diesel plant is going to be something more than that because it's still an operating facility. But I don't have a figure for you for what the difference in headcount would be.

Trying to think about what were some of the other. zero, and in terms of I'm trying to figure out what it contributes to the state economy. I'm trying to do some finger math for you, so let me circle back to you in a couple of minutes on that, if that's okay.

Sure, it's fine with me.

Feel free to. Yes, we'll come back to you for that answer, Mister York. In the meantime, assemblymember Pepin so I.

Have a couple follow up questions. To Assembly Member Bennett's line of questioning. It seemed so compelling, but then I end up a little confused as well, so maybe the witnesses can see me through it. It is that somebody, Member Bennett asserted that we don't need additional storage capacity. If I understood it right, keep nodding.

If I don't get it right, tell me. But rather we must operate at higher capacity. I thought, well, gee, that made some sense to me. Right? Because if you keep operating at higher capacity, you don't really need the storage.

Not quite higher capacity, just there much of the year. Pardon me, but I think she's asked me much of the year, they maintain close to 15 days worth of inventory. If we just simply increase the percentage of time in the year that they do that, we decrease the likelihood of price spikes.

So it doesn't operate at higher capacity. It's just many days there. At 15 days, do the things that we can do to keep that there. Now there will be unplanned things that will happen.

That's where I was headed.

But that doesn't mean you can't still. You can have unplanned things happen and let your inventory drop. But I think we're going to find out from the CEC there are many things they could do that aren't necessarily tremendous increase in capacity, particularly if, if they know this is coming and they have lots of time to plan.

There are things that you can do to make sure that you don't have. You certainly don't start with artificially Low ones. Just as you're getting ready to do planned maintenance, for example, you should be at 15 days. So it's not higher capacity, it's higher commitment to trying to keep yourself up at the higher end of inventory.

Understood? Understood. And I guess my question is, if we are having operational capacity limitations, if you will, is there some additional storage that would be needed so that we don't have those either unplanned or gee, we didn't have that much inventory. We weren't producing quite as much when, boom, something went offline.

So thank you for explaining the issue with me. Do you mind if I turn it over to the witnesses who may enlighten us as to whether that's a possibility or not. Your questioning was very compelling, but I just want to make sure we get the whole picture. Okay.

So to the witnesses, why don't you enlighten me about whether or not we can keep capacity at 15 days more times out of the year, as Assemblymember Bennett suggests, or not, because we might have an unplanned refinery upgrade, or not upgrade, but a refinery issue, that makes them not working. That makes sense.

I can share my perspective. I think one way to think about it is sometimes our inventories are at high capacity, sometimes they're at medium capacity, and sometimes they're at low capacity as an operational.

Operational, like we're actually generating.

No, as in how full our tanks are. And so if you go back to the images that Mister York showed, those tanks had a tank heel. They had a little bit of space at the top that we like to keep open, but they have a range in between those amounts. But isn't that storage?

Are we talking about storage then, at that point?

And maybe we're talking about different things. I think I was talking about the storage capacity, but I agree that there was another line of questions about running refineries at full capacity versus 50% capacity. And maybe I'm answering the wrong question, so apologies.

He's answering the right question.

Okay, and then, Mister York, did you want to provide your perspective in response to Miss Papen's question?

Yeah, I think I'll just come back to the cycling. I think it's the. If you're looking at 15 days of storage, or wherever you draw the line, it's a static number. And the reality is, those tanks, that volume flexes up and down, not on a weekly basis, not on a daily basis, but on an hourly basis.

And when you're going down some of these lines, like some of the Kinder Morgan lines, I don't. You know, you've got some lines where you've dumped product in and you have 24 hours to get the product out, because the next guys, the next shipper is coming in 24 hours behind you.

So I'm not really sure how you're going to maintain 15 days of storage in that tank when that tank has to turn every 24 hours. So I think it's, you know, that's where I started getting sort of twisted, is the. It's easy to say, keep 15 days in that tank.

Then I start thinking about operationally, how do you keep the operations running if you take effectively, you know, aren't we taking the heel from where it is up to 15 days, and then the working capacity is from 15 days up to the top.

I mean, that's where, I'm not saying that's the way it is, but that's kind of where, that's where I'm kind of starting from. I'm saying, can the system actually operate if the heel is 15 days deep.

Madam Chair. And I'll just say, I recognize that the elephant in the room, as it were, is the 15 day liquidity Reserve proposal.

And we definitely want to dive into that proposal tomorrow, understand the details of that proposal from the CEC, and also understand, you know, I think, answer the questions that we're always asking when we're developing policy. Right. What's the problem, what's the solution? And importantly, how do we implement that?

But I do want us to put a pin in that for now since we're at 330 and want to be able to finish this hearing, but plenty more. It's like a cliffhanger. Till tomorrow. Yeah. Stay tuned for tomorrow's hearing. Okay, sending Member Jackson.

So about that 15 days. Emily Flair. I think my first question is to Professor Mahoney. We were having some discussions about rockets and feathers. How do you turn that feather into a rocket? And can that be legislated?

It's a great question, and one way to think about it is if there are fewer price spikes, then consumers will less often go through this process where their out of pocket costs increase and then they're slow to subside.

So I think, one and again, don't want to get into the conversation for tomorrow, but one benefit of reducing price volatility is that we're going to be spending less time waiting for the retail price to come down.

And can that be legislated?

I think as economists, I think we get a little bit concerned about legislating exact prices. And so I would need to think more about the policy under consideration and whether it could be implemented without unintended consequences.

Well, I would love to continue to explore that because obviously that's one of the things that seems to be something we're trying to achieve. I mean, hey, I'm an Inland Empire guy. All we care car about is how high is our gas prices and do we have enough to get from work to home.

And so I'm trying to figure out what conditions, whether you talk about supply, will you talk about racket racks, whether you talk about refining capacity, storage capacity, what conditions would it take to provide the most optimal pricing for consumers?

And this is to Doctor York as well. Well, I'll just say one thing and then to Doctor York as well. I think reducing the market power in the industry is what is going to provide consumers with the lowest and the most stable prices in the market.

Okay. Doctor York.

I think shortening the supply chain is what happens, because what's happening is these refined as you're dropping refineries, and the CEC has this wonderful graph in their transportation assessment that in essence, what's happened now that we're down to nine fuels refineries, is there's no more slack in the system.

Which means that basically when you look at what the CEC has looked at, is that when you look at peak monthly gasoline demand versus gasoline capacity of the California refineries, it's basically in balance. So that in essence, you're now right on the verge of import parity.

And to what Neil was saying earlier, if you're having to bring in the incremental gasoline from someplace else, like whether it's Europe or Asia, you're looking at 30 days to do that. So how do you get that Shorter?

Because if something happens in those 30 days, that volume doesn't show up and that's where the price spike and that's where the volatility comes from. How do you get that supply chain? How do you shorten that supply chain so that, that, so that, you know, so you minimize the chance that something happens in that 30 days?

Cause it's not 30 days long. It's something Shorter than that. I think that's, I think that's what the, that's what the problem is. That supply chain, when something goes wrong, is 30 days. It's a 30 day lag. How do you shorten that down and how do you mitigate that time risk?

Right. And Professor Mahoney indicated that one of the things that would be helpful is to weaken the market power. How does one do that, Doctor York?

Well, I'm not convinced that I'll go back to, I'm not convinced that that's what the issue is.

I think that the price spikes and the volatility is being driven by the fact that when something, when there's an upset in the state, when there's an upset in the market, because there's no slack in the system, it takes 30 days. And that's best case scenario is 30 days for a replacement volume to show up.

How can you reduce that down? Is there some way to reduce it? Is there, you know, is there some way to you could, you know, could you grant a waiver and go from CARB to RFG and start bringing RFG from other parts of the country.

Now, there's air quality attainment issues around there, but that would shorten the 30 days. That's what I would be looking at. I would be looking at ways to shorten the response time because that's where the run ups and volatility come from.

It's that long lag in response between when the market has an upset and I, when the relief volumes can show up.

And Doctor York and Professor, what do you believe, number one, what's the guarantee that by eliminating the spikes that overall, at the end of the year, consumers are going to pay less at the pump?

Competition.

Competition. You want to talk more about that?

Yeah. Every day. Every day a retailer is looking across the street to see what the retailer is doing or down the road and they're looking at their volumes and they have to be competitive. They're going to be competitive. And if, you know, if I can sell more by lowering my price, I'll do that.

And so that competition, and it's a very, you got a better, you need to understand how very competitive it is. There are so many price makers out there at the retail level that, that in a sense solves, solves that problem. You know, I would like to mention too, is we have had price controls.

We did price controls in 1970s. And so that that impact, we, we had a flat, we had a margin that we couldn't change to and that went through after the spikes of the various shortage periods during the seventies. So we've done that. It was mainly considered not a good plan, but it was what it was.

And I have to say something about this inventory level again. And I think there's a sort of fundamental misunderstanding of the whole equation. Basically, you make stuff, you sell stuff, and then you have inventory. And if you start making more than what you're selling, you're going to increase your inventory.

And if you're making less than what you're selling, you're going to decrease your inventory. Now, the big problem is when you don't make anything, because now your sales go on and on and on and on and you're not adding to it. And consequently, the question is whether the inventory is five days, 15 days or 25 days.

I mean, obviously there's a buffer there that makes a difference. But if you're not making it, and it's important to recognize that every time these refineries go through planned turnarounds, they plan for all of these things. They set up their imports, they bring it from Washington state or they bring it from Southern California.

They're constantly moving product, and then the problem occurs is when it doesn't come back properly. It's a little bit like when you take your car in for repairs and you don't get it back on Wednesday, you get it back, you know, three days later because it doesn't come together as quickly as you thought.

That's what happens into the planned scenario and the unplanned scenario. It just, all of a sudden you're just toast. I mean, so, yeah, more inventory is probably better, but you still have to go out into that market and you have to buy, and that's when prices spike.

And is that a California market or.

Well, it's got to be available in California. So yes, it would be a California market.

I know somebody mentioned things about specs and a couple of years ago, last year, year before, I'm not sure exactly what, we ended up with somewhat of a price spike that occurred right around the time that we were going to change from summer to winter. We were still a couple months ahead.

And in that instance, in that instance, the Governor or CARB, I don't remember who did it, they basically said, okay, we can go early into winter spec. When we went early into winter spec to solve the problem that particular time.

So allowing a lesser spec does help relieve issues because you can more quickly get it from someplace else. The challenge is we've got to get a special one, and if we don't have to get the special one.

All right.

Thank you very much.

Okay. And I think some of the Member Wood had a question, and then I think that will have to be the last question for these panelists. And then we'll jump to our second panel.

Assembly Members, thank you. Thank you. And it's been fascinating discussion here, and I try to piece some pieces together here, but Mister Robinson, I think one of the things I heard from you is you set your prices on a daily basis, correct? Look at it on a daily basis. Look at it on a daily basis.

And you said one of the factors you look at is the price that your competitors are charging. How do you do that? Do you send people out to look at the stations? Do you, how do you get that information on a daily basis?

We used to, but now there's pricings. I mean, you can look at Gasbuddy, for example, and you can make a decision where you're going to go buy gasoline this afternoon or something like that. So there's definitely, there's feeds that go through it.

And in fact, our feed comes through opus, where they're looking at either credit card transactions or they're looking at things like gas buddy or whatever, and they end up with a something that's a halfway decent survey, but at least fairly easy to get.

So going back to, I think, comment, I think Doctor York said, so you get an upset in the market, or maybe you said, somebody said there was an upset in the market. Let's say it's an unplanned maintenance that happens out there. So now, presumably, if that company that had.

That has still got obligations, so they're going to have to go probably to the spot market or to get fuel to meet their obligations, is that a fair assessment? Yes. So that will increase their costs and increase prices for them? Yes.

But you as a competitor see that increased price and all your other retailers see that increased price and the prices go up for everyone. That seems to be, from our perspective, part of what's happening here.

So you talked about there's so many price makers in the retail market out there, but if one little glitch in the system leads to a spot market purchase and higher prices for that one entity, logically that should just hopefully just stay with that entity.

But it doesn't, because if all the other retailers are like you, looking at all the. Looking at the prices, you're all looking and seeing that that guy's got higher prices, there's an opportunity for me to have higher prices and then you get price spikes. Is that. Maybe Mister Mahoney could answer that? Is that a possibility?

Am I missing something here? But that's kind of what I'm hearing.

Well, partly what's occurring is the spot market is a significant driver to pricing in General relative to rack prices and dealer tank wagon prices. So when the spot prices go up, virtually all of the racks will go up.

Sometimes the supplier with the biggest problem might raise his price the most because he really, he or she really doesn't want to sell product because he doesn't have any, doesn't have as much. And so that's one way he or she can manage their inventories is by not being as competitive.

But in General, what happens is the rack prices all go up. So.

So reacting to one event, potentially.

Yes. Yes, that's true.

You said you get. You said, you said you sometimes get weird little jumps. I don't know what we're. A weird little jump is, but. And they get cleaned up quickly. So you get a rocket and a heavy feather, or, I mean, what do you get?

Well, I would, I would argue against the rocket thing. There is no doubt. There is no doubt that prices tend to go down slower than go up.

In fact, that's one reason we typically do better, because we tend to get our head handed to us on the way up, because what happens is prices will start jumping, and everybody's looking around and seeing that nobody's moving.

They don't want to move until they see us move, and we don't want to move until we see them move. And so no one moves. And all of a sudden, what you're doing is you're raising your costs without raising your retail. And so usually what happens is those scenarios is that there is a delay.

There is a delay. Now, the public doesn't see that because all they do is they see it when you start to raise your price. They don't know what's gone on, that the prices have already been increasing over a period of time. And so there's, there always, usually tends to be a lag in something like that.

And it all depends on kind of how far does it go. You know, sometimes it'll go 10 cents, 10 cents, 10 cents, 10 cents. Sometimes it'll go, you know, up a little bit and then it'll come back off. And so everybody is fairly conservative because they don't want to lose their sales on the way up.

And then what happens? What tends to happen is that, okay, now all of a sudden, prices start to drop. You're still carrying all your old inventory, and so you're going, wow, I'd like to get rid of that tank inventory before I start dropping my price.

And so, again, you're looking around at all your competitors and seeing what everybody else is doing. And, you know, especially if it was a more bloody period on the upswing, people will tend to be more slow going down because they, you know, they got hurt. Hurt. They were harmed economically on the way up. And so they'll.

They'll take advantage of it going down, but that's sort of the way it works. But we're not really a rocket on.

The way up, but it's not always an increase. You said all the racks tend to raise their prices fairly quickly. Why, if it's just a single entity that triggered this, why would all the racks now suddenly increase their prices and make it more expensive? Why does that happen?

Because I think all this really kind of gets interesting is that I think that when you look at all of the companies, the way that they judge their various divisions is their internal transfer. Prices are spot. And so the folks that are selling at the rack, selling dealer, tank wagon.

Their transfer price within their company is related spot. So they're always judged that way because spot is theoretically the alternative to the supply folks that they could say, well, we don't have to give it to you. We could go sell it out in the market and make more money. Consequently, your transfer price becomes spot.

And most of them seem to do it that way. Most of them seem to do it that way. So a spot price does impact rack prices. It's important to recognize that we're always sort of fixated about how bad we're getting screwed on the way up, on the way down. The same thing's happening.

And so what happens is somebody drop in, one of the rack supplier drops their price, and then some of the other suppliers go, well, we really didn't want to have to drop yet, but we need to because, you know, the rotten Robbie trucks aren't going to their terminals, they're going someplace else. So suppliers get disciplined that way.

Thank you. I appreciate that. I guess in my mind, it keeps circling back to the outsized influence the spot market has on this entire process here. And how quickly one entity and a spot price increase can lead to an incredible spike in the market price for the retail price for everyone.

Yet there's not a lot of scrutiny on how the spot market works.

I will say that one thing is high prices usually beget solutions quicker, because now there's more of an incentive that that tanker out there that was going to go someplace else now gets rerouted.

And so it's not necessarily a 30 day deal, but that tanker may end up getting here, you know, in three or four days, in which case then the problems resolved. But there is no doubt that when you, and this is really the issues when you get these unplanned situations.

And I think somebody mentioned the one a few years ago, and it was one of those ones where it just went on and on and on and on. And I think that that particular refiner thought that they were going to get it solved, thought they were going to get it solved, thought they were going to get assault.

And they're always short. And it really, you know, it made the market high for a longer period than normal. Thank you. Thank you, Madam Chair.

All right, well, thank you.

Well, that will have to be the last word, but just want to say thank you again to all of our witnesses, Mister Robinson, Doctor York, Professor Mahoney, for joining us and providing just a really, I think, in depth overview and explanation of the market, both in terms of production and market pricing dynamics with that, we are.

If I could jump in.

zero, if I could jump in really quick. I've got those numbers for you. Zero, yes.

All right. Yeah. We'll come back to you for you. You'll get the last word.

Okay. So their employment is, there's 366,000 employees in the industry in California. It's about $152 billion of economic impact. That's about 5% of state growth, state product. I don't know what the, I don't have a multiplier. So that's the direct impact.

But I can tell you at the national level, the multiplier is a little bit less than two. So if the national multiplier applies to California, then, you know, then the direct plus indirect would be something a little bit less than 10%.

All right. Thank you so much for reminding us and cycling back on that once again, thank you to all three of our panelists for joining us. We're going to pause for a brief commercial break and regroup. It's in three minutes at 350 to jump into our next panel. So thank you.

All right, we are going to go ahead and continue to move forward on our hearing. Thank you once again to all of our panelists. And I think we're going to jump into our second panel. So our second panel is focused on California's fuels transition plan.

Our first panel, I think, provided a really good overview of the petroleum market in California today. I think it's important for us to remember that all of the conversations that we're having as part of this hearing are happening within the context of not just California's transition, but a global transition to a clean energy economy.

And so as part of setting the stage to understand the challenges, the potential solutions, and the conversation that we want to have tomorrow, we wanted to just, I think, remind everyone of California's fuels transition goals. What's our plan as we move forward?

So we will be joined today by Siva Gunda, who is the Vice Chair of the California Energy Commission. Thank you. We are also welcoming Rajinder Sahota, who is the deputy Executive officer for climate change and research at the California Air Resources Board.

After we hear from the Administration, then we'll be hearing from a number of stakeholders to share their perspective on the transition and help us understand how they are planning for our fuels transition within the context of this conversation. So thank you so, so much for being here, for all the work that you're doing in this space.

Vice Chair Gunda, we'll go ahead and turn it over to you.

Thank you, chair. Thank you so much for having us today. I'm here. Chair, Vice Chair, and all the Members of the Committee. For the record, my name is Siva Gunda. I currently serve as the Vice Chair of the California Energy Commission. And I'll pass it to my colleague here to introduce herself.

Good afternoon. It's an honor to be here and help answer questions about some of the policies and programs for the transition to clean fuels. I'm Rajinder Sahota, the deputy Executive officer at CARB.

Thank you, Rajinder. With that, we'll go to the second slide. Thank you, chair. As you noted, given the context of the conversations for the next couple of days, we see that the first panel provided a lot of this information.

We'll try not to duplicate that information, but to the extent that it's relevant in our transition planning, we'll try to bring it up a little bit. So with that, just wanted to begin with a quick review of how the industry and the market is set up in California.

So the map shows here what a typical daily flow of crude oil and refined gasoline into and out of California. Looks like all values shown here are in thousands of barrels a day. Californians use about 800,000 barrels of refined gasoline a day.

Or if you look at it, it's just about a gallon per capita per day in California. Looking at 2023, Californians paid about $62 billion at the pump for refined fuel. Most of the California's refining capacity is clustered around the Bay Area and Los Angeles.

These refiners receive crude oil through a combination of local production and marine imports, about 1.4 million barrels per day. These refiners, on an average, produce about 750,000 barrels of California spec gasoline per day and about 100,000 barrels of non CARB gasoline, which goes to our neighboring states.

California also receives about 100,000 barrels of gasoline blending components and finished fuel via marine terminals every day. The CARB gasoline is distributed, of course, as the first panel described, to various fuel stations in California, while Nevada and Arizona are primarily served through pipeline infrastructure. Next slide, please.

So it's important as we think through this particular conversation to set the stage between the demand and supply and the policy realm that we are working within and in interest of time. I'm going to go over the entirety of the slides, but Rajinder is here to answer a number of questions and support the discussion.

California has been implementing policies to reduce harmful air pollution and greenhouse gas emissions for decades. For the transportation sector, this includes adopting zero emission vehicle regulations such as advanced clean cars, advanced clean fleets, and advanced clean trucks. These clean technologies are critical to reducing harmful air pollution in some of the most burdened communities located in California.

As Californians continue to increase demand of these clean vehicles, it is critical to ensure that the clean energy transition and infrastructure is available and affordable. In terms of just looking at the charts that you have there, it is useful to just look at what's happening to the overall demand of gasoline.

We have reached our peak gasoline demand, refined gasoline demand in 2017, and since then, it's been going down. Over the last five years, we've lost about 10% of demand in California, and that's directly correlated to the EV penetration in California.

As you look at the chart, we are almost at the precipice of about 2 million cumulative EV's, our zero emission vehicles sold in California. And as you look at the forecast, it's going to continue to move forward.

And so it's the important thing to recognize on the forecast is that the forecast is driven by what we call a consumer preferences survey. So every three years, CARB and CEC co sponsor a consumer survey to really understand consumer preferences, and that's what really goes into our forecast. Next slide, please.

As many of you know, AB 32 created California's climate programs and set a 2020 greenhouse gas emissions reduction goal, which was extended by SB 32 to include a 2030 goal.

And finally, in 2022, AB 1279 established two additional goals to reduce anthropogenic ghg emissions by 85% below 1990 levels by 2045 and achieve carbon neutrality no later than 2045. In addition, among other things, Executive order N 7920 sets a course to end sales of internal combustion engine vehicles by 2035.

Achieving these goals requires an expedited transition to Low and zero carbon vehicles along along in the transition to Low carbon fuels to reduce the carbon toxic and unhealthy pollution from transportation sources and ensure a thriving California economy long term.

There are substantial health and economic benefits associated with the state realizing its climate goals, including over $10 billion provided through California climate investments benefiting California residents through increased public transit, home weatherization, and drought resiliency, just to name a few of the has benefited priority communities that suffer disproportionately from the impacts of climate change.

The value of health benefits from these regulations is estimated to reach 78 billion in 2035 and about 200 billion by 2045 from avoided mortality, hospital visits, and sick days. Many of these strategies that we are using to address climate change are the same strategies that will also drastically improve air quality.

Fossil fuel use in vehicles is the single biggest source of greenhouse gas and criteria pollutant emissions in the state. Accordingly, carbs regulations are designed to decrease demand for petroleum by supporting the transition to zero emission vehicles and deployment of cleaner alternative fuels.

The car board has already taken step towards the goals identified in the scoping plan by adopting regulations such as clean car stew, advanced clean fleets, advanced clean trucks, and other rules that promote and hasten the development of Low and zero emission technologies. Next slide, please.

The scoping plan prioritizes the move away from fossil energy sources and combustion technologies and demonstrates the need to build out significant Low carbon fuels and the deployment of liquid biofuels for hard to electrify technologies such as aviation and marine use.

The result of successful implementation of the technology and fuel switching called for in the scoping plan is a dramatic reduction in fossil fuel demand. The scoping plan modeling resulted in a 94% reduction in liquid petroleum demand by 2045 compared to 2022, but we are all well on our way.

Based on the 2023 LCFS reporting, the Low carbon fuel standard program has tripled the volume of Low carbon fuel since the start of the program through 2023, with renewable diesel displacing over 50% of fossil diesel used today, this shift has not only decreased ghg emissions, but also provides reductions in pm and nox.

Next slide, I'm going to go through a little bit of the problem statement in which we are operating over the last two years. So beginning with this chart, I'll just try to situate you because we have about four slides in here that all go through a similar color code.

So what we're seeing here is 2022 and 2023 retail prices in green. The red is the US average prices, and the blue is the difference between California average versus Us average. That's what you're seeing there. So just want to note a couple of key points here.

So we put two lines for the September price spikes we have seen the last couple of years. As you see there, we have a line to kind of show where the price spike began and then aligned to show where the price spike maximized. Two things worth of note here.

One is the California difference between California and the US was about $1.47 on 912022 before the price spike started, and it ended at 258. The difference at the top of the price spike and the same thing on the spike that we saw in 2023.

Similarly, the average price started at 147, the difference, and then it peaked at $2.25. So just wanted to observe that as we go into the next few slideshow to further that understanding. Next slide, please.

So now there has been, I mean, again, chair, I want to just repeat your kind of call for action today to be factual and provide information so you could use the data to contemplate as we move forward in these discussions. So there are some assertions that the gasoline spikes happen because of taxes and fees or crude oil.

So just let's kind of take that a bit by bit, just as a way to have the conversation and the transparency. So the first part here is, what you're seeing here is a stacked chart. So at the bottom of the stacked chart is the taxes and fee.

And I will, as I have before acknowledged in the hearings, the taxes and fees do contribute to the prices of California gas pump prices. But it's important to note that it is flat. It just states flat throughout the year. The next one that you're seeing on the top of that is the crude oil.

The crude oil prices also change during the day, sorry, during the year. And the prices in California. The crude oil prices in California that the refinery source are slightly higher than the rest of the country, given some of the unique plants that one of the panelists before talked about.

So, kind of going to the next slide, what we try to do here is, okay, given that you have taxes and fees, that's flat. Acknowledging that the taxes and fees do contribute towards prices, but they don't contribute towards the price spike, let's remove that for a second.

And given that the crude oil prices vary through the year, and it also is like closely indexed to the rest of the country, it might be slightly higher by a, by a cent or two, but overall pretty well indexed.

If you remove that as well and then compare what happens to the price prices, just that the industry margins are.

So what you're looking at here is once a refinery procures a gallon or a barrel of crude oil, so all that has been paid out at this point, to that point to the pump between the refinery and the retail industry, what is the totality of margin? That happens again to Assembly Member Bennett's conversation today.

Some of these are profits, some of these are operating costs, and we are not talking about specifically whether the industry should be profitable or not. So that's not the question. It's about how can we have profits coexist with consumer protection.

So then when you look at it here again and look at it California, look at the price spikes that happen, that are solely, solely starting from the refinery acquisition to the retail pump. And then when you compare that to the United States, it goes up and down very slightly and you don't see the same level of spike.

And the difference in blue really kind of drives the point that there is something peculiar about our refining and retail sector that is very atypical of the rest of the United States, and that causes that.

So the question then is, what are the potential variables that are driving that and what can we do to ensure that we have consumer protection? And one of the key variables there about consumer protection is how do we reduce those spikes? Next slide.