It was just months ago that Governor Gavin Newsom appeared before cameras and labeled the oil industry the “polluted heart of this climate crisis.” Now, in a stunning about-face, his administration is collaborating hand-in-hand with refiners to prevent what could be California’s most severe fuel supply shortage in decades. The shift is not ideological, he maintains, but pragmatic a move to stabilize a market on the cusp of losing almost one-fifth of its capacity to process crude.
The catalyst for this change lies in a string of refinery shutdowns. Phillips 66 intends to close down its 139,000-barrel-per-day Wilmington refinery by the close of 2025, and Valero has indicated that it intends to shut down the 145,000-barrel-per-day Benicia plant in April 2026. Combined, these facilities represent 17% of the refining capacity in California and 11% of the West Coast’s total. The shutdowns come on the heels of previous losses, such as Marathon’s Martinez refinery in 2020 and Phillips 66’s Rodeo facility last year.
California’s refining system is especially at risk due to its geographical insularity. No pipelines link the state to Gulf Coast terminals, and few refineries outside California can generate its specialized CARBOB gasoline blend. Consequently, the majority of the supply is made locally, and imports from South Korea, India, and Washington state make up shortages during outages or high demand. When domestic capacity declines more rapidly than consumption falls, the consequence is obvious: increased volatility and price spikes.
Already, California gasoline at retail is averaging around $4.47 per gallon, more than $1 higher than the national average, as a result of a mix of taxes, environmental compliance, and the cost of making the cleaner-burning mix. Alone, state excise taxes amount to $0.60 per gallon, the highest in the country, and environmental programs like the Low Carbon Fuel Standard amount to $0.54 per gallon. The California Energy Commission estimates that the factors, along with the state’s “Mystery Gasoline Surcharge” discovered in 2015, explain virtually all of the price difference with the rest of the nation.
The engineering problem of substituting lost capacity is daunting. Imports need ample shipping, port offloading, pipeline, and storage facilities networks that have to be streamlined to be able to receive surges without upsetting supply-demand equilibrium. Experts like Severin Borenstein caution that if not planned wisely, trans-Pacific shipments might be too slow to react to market shocks, ensuring higher volatility. California’s new minimum inventory legislation might assist, but its effects will be pushed to the limit with persistent import dependence.
Some industry players advocate increasing in-state crude production, especially in Kern County, to make refineries economically viable. California’s oil fields, however, produce mainly heavy crude trapped in multilayered geology that must be extracted using energy-hungry steam injection. That makes it more costly to produce than in Texas or North Dakota, and world crude prices, expected to decline in the years ahead, may make much of California’s production economically uneconomic. To be sure, opening up environmental limits would hardly mitigate such underlying economics.
Another avenue is modernizing refineries. The plants might be repurposed to make renewable diesel or sustainable aviation fuel, as industry analysts have proposed, but capital expenditure and regulatory clarity are needed for such conversions. Absent these, operators might opt out altogether, as Chevron did when it relocated its headquarters to Texas and signaled potential refinery shutdowns.
The political stakes are high for Newsom. Republicans have latched onto predictions denounced by his office as “unscientific” that gas may hit $8 per gallon, characterizing the crisis as the result of his own policies. Environmental groups blame him instead for taking a “drill, baby, drill” stance that undercut California’s climate leadership. Over 120 groups signed a letter opposing his effort to simplify Kern County drilling permits, threatening greater pollution and public health risk.
But the governor’s energy staff, headed by California Energy Commission Vice Chair Siva Gunda, has accepted much of the industry’s advice: stabilizing local crude production, reversing some import limits, and putting the refinery profit cap on the shelf. Gunda’s flights to Houston and San Antonio to discuss with Valero and Phillips 66 executives are evidence of the need for compromise before losses in capacity become consumers’ pain.
In Benicia, where Valero’s refinery has stabilized the local economy for five decades, the threatened closure could wipe out 10% of the city’s yearly tax dollars. Budget reductions already have nixed July 4th fireworks and Christmas tree lightings. It provided that economic blanket to remain a small community, City Manager Mario Giuliani said. “Well, now that is gone.”
For California’s fuel market, the coming year will be an exercise in engineering logistics, political horse-trading, and economic toughness. Through increased imports, subsidies aimed at specific refineries, or strategic drilling, the state needs to close the gap between its climate goals and the technical limits of maintaining gasoline affordability in the world’s fourth-largest economy.
