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California drivers of gas-powered vehicles have likely noticed an unwanted recent development: the price of fuel has increased markedly in recent weeks.
The roughly 85-cent increase since February is largely driven by the spike in oil prices tied to the war in Iran, according to Severin Borenstein, an energy economist at the University of California, Berkeley. Ships carrying oil have been bottlenecked along the Strait of Hormuz, a key oil supply route that borders Iran, since the United States launched a war that killed Iran’s supreme leader and other top officials on Feb. 28. In retaliation, Iran has blocked shipments of oil suppliers. The conflict has caused the largest oil supply disruption in history, the International Energy Agency wrote in its March oil market report.
While the entire country has seen an increase in gas prices, a gallon of gas still costs about $1.60 per gallon more in California than the national average.
“We started out higher than the rest of the country, and we’re higher than the rest of the country by about the same amount as we were before the war,” said Borenstein.
Several factors contribute to the higher gas cost in California, including environmental programs that aim to reduce greenhouse gases but also increase the cost of fuel. Since 1996, California has required a cleaner gasoline blend that reduces smog-forming emissions, but is more expensive to produce. California also has a unique cap-and-invest program that establishes a steadily declining limit – a “cap” – on sources of greenhouse gas emissions in California and puts a price on these emissions. The market-based program has been a key part of California’s strategy for reducing greenhouse gas emissions, but it results in a higher per-gallon gas price of about 23 cents, according to an analysis conducted by the state.
In addition to these programs, California has imposed a 61-cent per gallon state gasoline tax that helps fund infrastructure improvement projects and a sales tax of 2.25%, which can add another 10 to 15 cents.
The sum of the cost of the environmental programs, taxes and fees is around $1.10 to $1.20. That’s still around 40 to 50 cents short of the price differential between California and the rest of the United States. In other words, the price differential cannot be fully explained by these elements alone.
This unexplained price difference was first studied by Borenstein in 2017. He termed it the “mystery gasoline surcharge.” The Department of Petroleum Market Oversight, an independent watchdog agency within the California Energy Commission, confirmed the existence of the mystery surcharge in a 2024 report, noting that the mystery surcharge averaged $0.41 per gallon between 2015 and 2024 and cost Californians $59 billion.
Borenstein and other experts have theories about what drives it. The surcharge appears to have emerged after a 2015 oil refinery explosion in Torrance, Borenstein said. The sudden increase in the mystery gas surcharge in the years following the explosion helps explain where it originates: not in the production of the oil, but somewhere downstream.
“Most of that differential does not show up in the wholesale spot price for gasoline,” Borenstein said. “It shows up downstream in distribution, marketing and retailing.”
Borenstein’s first theory about what drives the surcharge is related to the high concentration of refinery ownership in California. According to the petroleum oversight department report, four companies — Chevron, Marathon, PBF and Valero – control 90% of in-state crude oil refining capacity.
“The gasoline refining market in California is best characterized as an oligopoly, with few firms controlling the vast majority of supply,” the petroleum oversight department wrote.
Refiners don’t directly set gas prices. But, Borenstein said, there are indirect levers that these companies can use to control the price, such as how they set the wholesale price that they charge to gas stations and contractual arrangements that determine how much stations can mark up the price of gas.
Borenstein’s second theory is that California drivers are simply willing to pay the extra price. Borenstein has noticed that gas stations in California can have significant price dispersion in the span of a block: in some cases, one station may charge 60 to 80 cents less than the brand-name gas station down the street. That’s unusual compared to the rest of the country, where proximal gas stations generally have equal or much closer prices, Borenstein said.
“There does seem to be some greater willingness in California to just pay whatever their regular station is charging, regardless of how much they could save by driving an extra block or two or stopping at a different station,” Borenstein said. “And that is part of the problem.”
Some factors may influence these consumer behaviors such as specialized gasoline products like Chevron’s Techron gas that the company says can extend a car engine’s life. California also has less gas station density than other states, meaning the price differences in stations may not be as visible to drivers.
