More Refineries Are on the Verge of Leaving California: Expert Explains Why | Catherine Reheis-Boyd - YouTube

California Faces Energy Crisis as Major Refineries Exit, Gas Prices Could Soar to $8 per Gallon

Bottom Line Up Front

California confronts a self-inflicted energy crisis as two major refineries prepare to shut down by 2026, eliminating 20% of the state's refining capacity and potentially driving gasoline prices to $8.44 per gallon. The crisis stems from Governor Gavin Newsom's aggressive regulatory assault on the petroleum industry, including new inventory mandates, profit caps, and carbon intensity requirements that have made California refineries economically unviable. Despite federal elimination of EV mandates that undermines the state's transition timeline, Newsom's belated attempts at industry collaboration come too late, with refiners having already committed over $1 billion to closure costs.

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California is confronting a mounting energy crisis as two major oil refineries prepare to shut down operations, potentially eliminating nearly 20% of the state's refining capacity and driving gasoline prices to as high as $8.44 per gallon by late 2026, according to industry analysts and state officials.

The dual closure of Phillips 66's Los Angeles-area refinery by the end of 2025 and Valero Energy Corp.'s planned shutdown of its Benicia facility by April 2026 has triggered urgent warnings from lawmakers, industry groups, and economists about California's fuel supply stability. Together, the facilities process approximately 284,000 barrels per day, representing a critical component of the state's energy infrastructure.

Market Signals Reflect Hostile Environment

The severity of California's regulatory environment became starkly apparent when Valero announced its closure intentions. "The next day, their price of stock went up because these investors were so happy that Valero was no longer going to be in business in California," said Catherine Reheis-Boyd, president and CEO of the Western States Petroleum Association (WSPA). "That is what the market signal is right now in California."

The investor enthusiasm for refinery exits reflects the challenging economics of operating petroleum facilities in California, where regulatory costs have mounted significantly. According to industry estimates, California refineries face operating costs at least twice as high as facilities elsewhere in North America.

Price Impact Projections

A comprehensive analysis by University of Southern California Professor Michael Mische projects dramatic price increases as refining capacity contracts. His study estimates gasoline prices could surge 33.6% to as much as $6.43 per gallon by late 2025 following the Phillips 66 closure, and potentially reach $8.43 per gallon by the end of 2026 after Valero's shutdown.

Currently, California gasoline prices average $4.85 per gallon, already $1.69 higher than the national average due to the state's unique fuel blend requirements, environmental regulations, and elevated taxes and fees that add approximately $1.10 per gallon above baseline costs.

"California can ill afford the loss of one refinery, let alone two," Mische warned in his report. The analysis indicates California could face a gasoline deficit ranging from 6.6 million to 13.1 million gallons daily, as production capacity shrinks while demand remains robust at over 13.1 million gallons per day.

State Government's Regulatory Assault

The refinery exodus represents the culmination of what industry officials characterize as a systematic regulatory assault by the Newsom administration on California's petroleum sector. Over the past five years, the state has implemented an unprecedented series of measures that have fundamentally altered the economics of refinery operations.

Legislative Barrage: Governor Gavin Newsom signed Assembly Bill X2-1 into law in October 2024, expanding the California Energy Commission's authority to require minimum fuel inventories and regulate refinery maintenance schedules. The legislation, enacted during a special session specifically convened to address gasoline price volatility, imposes penalties of up to $1 million per day for non-compliance.

This followed Senate Bill X1-2, which created the Division of Petroleum Market Oversight and authorized potential profit margin caps on refiners. Combined, these measures give state regulators unprecedented control over refinery operations, from maintenance schedules to inventory levels to profit margins.

Low Carbon Fuel Standard Escalation: Perhaps most significantly, the California Air Resources Board (CARB) approved major amendments to the Low Carbon Fuel Standard (LCFS) in November 2024, taking effect July 1, 2025. The updated LCFS accelerates carbon intensity reduction targets from 9% by 2025 to 30% by 2030, compared to 2010 baseline levels.

Initial state estimates projected the LCFS amendments could increase gasoline prices by 47 cents per gallon by 2025, though CARB later disavowed these projections. Independent analysis by the University of Pennsylvania's Kleinman Center for Energy Policy warns of potential increases up to 85 cents per gallon through 2030.

Cumulative Regulatory Burden: The regulatory cascade extends beyond fuel standards. California has implemented a 3,200-foot setback requirement for new oil wells, effectively preventing new drilling permits in Kern County, which produces 75% of the state's crude oil. The Bay Area Air Quality Management District assessed an $82 million fine against Valero's Benicia facility in November 2024, exemplifying the escalating enforcement environment.

Newsom's 2020 executive order banning sales of new gasoline-powered vehicles by 2035 sent a clear market signal about the state's long-term intentions, contributing to investor pessimism about California refinery investments.

"We cannot afford to lose any more refineries in this state," Reheis-Boyd emphasized, noting that California has seen its refinery count decline from 30 facilities in the 1980s and 1990s to just nine currently operating.

Supply Chain Vulnerabilities

California's unique position as what industry officials term an "oil island" compounds the supply challenge. The state has no pipeline connections to other major refining regions and must import approximately 66-70% of its crude oil from foreign sources, primarily from countries that don't maintain California's environmental and labor standards.

The state's refineries produce a specialized gasoline blend (CARBOB) that meets California's strict environmental specifications. This reformulated fuel can only be manufactured by properly equipped refineries, limiting import options primarily to facilities in Asia, particularly Japan and Korea.

The potential shift toward increased imports faces significant logistical hurdles. Port officials at Los Angeles and Long Beach have indicated they are not prepared for the substantial increase in petroleum product imports required to offset lost refinery production. Each crude oil tanker would need to be replaced by at least three smaller gasoline tankers, creating port congestion issues.

Federal EV Mandate Reversal Compounds Crisis

The elimination of federal support for California's electric vehicle mandate has fundamentally altered the state's energy transition calculations, potentially exacerbating the refinery crisis. President Donald Trump signed legislation in June 2025 blocking California's rule to phase out sales of new gasoline-powered cars by 2035, revoking EPA waivers that enabled the state's aggressive EV transition.

The U.S. Senate voted 51-44 in May 2025 to block California's EV mandate, with the House having previously approved the measure. Under California's now-blocked mandate, 35% of new 2026 model cars were required to be zero-emissions, ramping up to 100% in 2035. Seventeen states representing 30% of the U.S. vehicle market had adopted California's standards.

The federal reversal sends contradictory market signals to refinery operators. While state policies continue discouraging petroleum infrastructure investment through threatened demand destruction, federal action suggests gasoline demand may persist longer than California policymakers anticipated. Major automakers widely applauded the federal reversal, with General Motors stating it enables them to "offer customer choice across the broadest lineup of gas-powered and electric vehicles."

Newsom's Belated Reversal Attempts

Facing the reality of refinery closures and mounting criticism, Governor Newsom has begun a dramatic about-face from his confrontational approach to the oil industry. After years of vilifying petroleum companies as price-gouging profiteers, Newsom directed the California Energy Commission in April 2025 to "redouble the state's efforts to work closely with refiners."

The governor's staff recently drafted language for potential legislation to fast-track drilling permits in Kern County, with drillers potentially exempt from lawsuits under the California Environmental Quality Act through 2036. The California Energy Commission is reportedly searching for a private company to purchase Valero's Benicia refinery to keep it operational.

This represents a stark reversal from Newsom's previous rhetoric. When gasoline prices spiked in 2022 and 2023, he accused oil companies of "lying and gouging Californians to line their own pockets." At the signing of Senate Bill X1-2, he appeared at a podium with a sign reading "Holding Big Oil Accountable."

Industry representatives remain skeptical of Newsom's newfound collaborative tone. Both Phillips 66 and Valero have taken combined balance sheet charges exceeding $1 billion related to their planned closures, making reversal economically challenging.

Regional and Economic Impact

The supply disruptions extend beyond California's borders. Arizona and Nevada, which lack their own refining capacity, depend on California facilities for their fuel supplies. Both states' governors—Republican Joe Lombardo of Nevada and Democrat Katie Hobbs of Arizona—jointly warned of regional price effects.

Beyond consumer prices, the refinery closures threaten significant job losses. The Phillips 66 facility employs approximately 600 workers and 300 contractors, while Valero's Benicia refinery supports about 400 employees. Local communities face substantial economic disruption from the loss of major employers and tax revenue.

The broader economic impact extends to aviation fuel supplies for major airports including Los Angeles International and San Francisco, potentially affecting airline operations and ticket prices.

Investment Paralysis and Policy Uncertainty

The conflicting signals between state and federal policy create unprecedented uncertainty for energy infrastructure investment. Refiners face potential demand destruction from state policies while simultaneously confronting extended demand scenarios under federal policy. This uncertainty paralyzes long-term investment decisions essential for maintaining reliable fuel supplies.

Even before the federal mandate reversal, California's EV transition faced significant challenges. The state estimates it needs 1 million public charging stations by 2031—almost 10 times the current number—and 2.1 million by 2035. The Alliance for Automotive Innovation warned that meeting these targets would require "a miracle."

Looking Forward

As California attempts to balance its climate ambitions with energy supply reliability amid federal policy reversals, the state confronts a self-created crisis requiring immediate policy recalibration. The California Energy Commission is expected to release recommendations by mid-2025 on maintaining adequate fuel supplies, but with Valero's decision timeline requiring resolution this year, the window for preventing further supply disruptions is rapidly closing.

Fundamental policy reversals necessary to restore refinery viability—such as LCFS modifications, regulatory relief, and permitting streamlining—would require Newsom to abandon signature climate initiatives that define his political brand. The state's exploration of options including fuel specification changes and enhanced port infrastructure represents a tacit acknowledgment that current policies have created an unsustainable situation.

California's energy crisis serves as a cautionary tale for other states considering similar aggressive climate policies. The disconnect between aspirational environmental goals and technical implementation realities has created supply vulnerabilities that threaten both economic stability and energy security. As the nation's largest state economy confronts the consequences of ideologically-driven energy policy, the unfolding situation offers critical lessons about the pace and scope of sustainable energy transitions.

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Sources

1. Phillips 66 Company. "Phillips 66 Announces Shutdown of L.A. Refinery." October 16, 2024. https://www.newsweek.com/phillips-66-shut-down-los-angeles-refinery-900-workers-california-1970632
2. Valero Energy Corporation. "Valero Notice to California Energy Commission." April 2025. https://www.ogj.com/refining-processing/refining/operations/article/55284361/valero-to-shutter-at-least-one-of-its-california-refineries
3. U.S. Energy Information Administration. "California law and refinery closure reflect ongoing challenges for the state's fuel market." October 2024. https://www.eia.gov/todayinenergy/detail.php?id=63944
4. Mische, Michael A. "California Gasoline Price Analysis." USC Marshall School of Business. May 2025. https://californiaglobe.com/articles/california-facing-8-43-gallon-gas-a-75-increase-as-refineries-close/
5. California Energy Commission. "Senate Bill X1-2 Implementation." 2024-2025. https://www.energy.ca.gov/proceeding/senate-bill-x1-2-implementation
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14. San Francisco Chronicle. "California could lose 20% of its refining capacity." April 18, 2025. https://www.sfchronicle.com/california/article/refinery-closures-gas-prices-20279856.php
15. Trump Administration. "Congressional Resolution Blocking California EV Mandate." June 12, 2025. https://www.axios.com/2025/06/13/trump-california-gas-car-ban-block
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22. More Refineries Are on the Verge of Leaving California: Expert Explains Why | Catherine Reheis-Boyd - YouTube