How Events in Ukraine Affect the Price of Gas in California

Gas prices in California reached record highs this week, with the statewide average topping $5.50 a gallon. That comes as President Biden on Tuesday announced a ban on the U.S. import of Russian oil, in response to Russia's invasion of Ukraine.

To get a sense of what this all means for oil production and consumption in California, KQED's Saul Gonzalez spoke on Wednesday with UC Berkeley economics professor Severin Borenstein, an expert on energy markets.

This interview has been edited for length and clarity.

SAUL GONZALEZ: So let's talk about this ban on Russian crude first. The U.S., including California, only gets about 3% of its petroleum from Russia. So is turning off the spigot from that country really going to have much of an effect on California? And how will refineries make up for that loss?

SEVERIN BORENSTEIN: Well, it is a very small amount of crude oil relative to what we process every day, and so it's not going to have much effect. Unfortunately, it won't have much effect on Russia, either, if that's all that happens worldwide. The hope is that this is going to grow into a larger banning of Russian imports in Western Europe and other parts of the world, and that could have a real effect on Russia by making it more difficult for them to sell their oil or to sell it at a lower price. The example we have from when we did a similar thing with Iran in 2010 and it turned out to be very effective, they did manage to still sell some of their oil to China, but at a deep discount which lowered their revenues. The effect in California of the U.S. ban on Russian imports is going to be hard to even notice in prices relative to the overall just increase in crude oil prices. It's a small amount and can be pretty easily replaced. What's going on really right now is that crude oil prices have gone way up because there's concern that Russian oil generally will be taken off the market. And since they produce about 10% of world supplies, that would be a big hit to the supply in the market. The concern that that will happen is what's driving up crude oil prices now, even though Russia so far has been able to continue to sell its oil.

As we speak this morning, the average price of a gallon of regular gas is now over $5.50 here in California. I know you don't have a crystal ball in front of you, but how much higher should we expect to see those numbers go?

Unfortunately, it's really very difficult to tell. It depends entirely on whether Vladimir Putin decides to push forward with his invasion of Ukraine or to pull back. If he did decide this isn't worth the losses and to declare victory and withdraw, oil prices would drop dramatically and gasoline prices would follow within a few weeks. On the other hand, if he continues to push into Ukraine and manages to actually defeat the Ukrainian resistance, we are very likely going to move towards a large-scale worldwide reduction in sales from Russia. And that means that the price of oil is likely to stay high for a very long time because replacing all of Russia's production would be very difficult and would not happen quickly.

In response to high gas prices, there have been calls to roll back the gas tax and rev up new drilling. What do you think when you hear those kind of ideas put on the table? Are they feasible to do?

Well, they're feasible to do. I think they'd both be bad policy. The gas tax is there for a reason. It pays for a loss of the infrastructure we need, and it helps represent the real damage that is inflicted when people burn gasoline and create congestion on roads and so forth. So in our research, we've actually found that the gas tax is still less than all of those effects that people have what we call externalities when they burn gasoline. As far as drilling for more oil, there's a world market for crude oil, even if California did produce an extra 10 or 20 or 50 percent of California's current production. It would have a very tiny effect on the world price of crude oil, and that's what drives the price of gasoline everywhere, including in California.

Do you have any kind of street-level advice for California consumers right now as they confront high gas prices?

People are impacted by high gasoline. Prices can do some things to reduce the impact, and the primary thing you can do right away is shop around for cheaper gasoline because there is huge price dispersion between stations, even sometimes on the same block where there's 50 or 75 percent of gallon differentials go to the cheaper station. That not only will help save you money, but it will put pressure on the expensive stations to lower their prices, and so we can get a more competitive market in California if we are willing to shop around more.