Californian Energy Policy, Cautionary Tale for America

California epitomizes all that is wrong with American energy policy.

An oil drilling platform off the coast of Surfside, California, October 18, 2010
An oil drilling platform off the coast of Surfside, California, October 18, 2010 (Neil Kremer)

No state better represents the bankruptcy of left-wing energy policy than California. In prioritizing environmental concerns over energy cost and security, it has had made itself woefully unattractive to businesses. Californian taxpayers are left to pick up the tab. The once Golden State stands as a sad example of how not to do energy policy.

A solidly Democratic state, President Barack Obama’s party has had almost free rein in California for more than a decade. Motorists are paying the price for their failed policies. California currently boasts the highest gasoline prices in the United States.

While California’s population and gasoline consumption have increased nearly 50 percent since the mid 1980s, the number of refineries producing gasoline in the state has since dropped from 32 to fourteen. As a result, oil companies import an estimated 3.5 million gallons of gasolines every day to meet demand.

The small number of refineries make California’s gasoline market extremely vulnerably to supply disruptions.

Such a disruption occurred this week when an ExxonMobil refinery in Torrance was forced to suspend operations due to a power shortage. The immediate drop in gasoline production followed Chevron’s decision to shut an oil pipeline that delivers crude to Bay Area refiners.

For a state of nearly forty million people who each consume a gallon of gasoline per day on average, it should be the greatest possible embarrassment to the government that a mere couple of disruptions in energy supply should cause prices to spike so dramatically.

In one regard, legislators are not to blame. California is considered a “fuel island” because there are hardly any pipelines that link it with nearby oil-producing states. Virtually all petroleum imports arrive by sea which take between ten days and six weeks to arrive. But once in California, gasoline and other petroleum products must pass through an infrastructure that is at or near capacity and regulators impose such strict population standards that building new plants is practically impossible.

Moreover, the state requires the cleanest burning gasoline in the world which makes fuel production far more expensive than in the rest of the country. And California’s gasoline taxes are the highest in the United States, some 63 cents per gallon, 16 cents above the natural average.

California used to be the golden land of oil but today, it has all but driven the industry into the sea. Even there, it lives on borrowed time. The state has imposed a moratorium on offshore drilling leases. Production continues only on existing leases, from existing platforms.

Meanwhile, the state is pouring billions into unprofitable clean energy projects. Before the end of the decade, a third of California’s energy needs should be met by renewable production — a goal that looks impossible to achieve if the state is to simultaneously mend its $16 billion deficit this year.

Californian energy policies are reflective of its irrational economic policies in general. CNBC ranks the state among the least business friendly in the union. California’s fortieth place is largely due to easy access to capital and high level of innovation in Silicon Valley but the cost of doing business is higher only in Hawaii and Massachusetts.

Hundreds of business leaders interviewed by Chief Executive magazine rank California fiftieth, citing its burdensome regulations and high taxes. Survey respondents uniformly declared that the state’s regulators are hostile to them. “No one in his right mind would start a new manufacturing concern here,” said one Californian CEO.

Absent political change, further decline seems inevitable. Californians better prepare for more disruptions and shortages in the near future and long lines at the pump.