Oil exodus

The Phillips 66 refinery south of Los Angeles processes 139,000 barrels of crude oil into gasoline, diesel, jet fuel, and fuel-grade coke for boilers and furnaces each day. But it’s ending its century-long operation this fall, citing market dynamics and the uncertainty of operating in California.

Another plant, a Valero refinery northeast of San Francisco that processes 145,000 barrels per day, may close by April 2026. Although Phillips 66 said it will import gasoline, diesel, and jet fuel to satisfy demand, industry analysts still expect the closures—representing nearly a fifth of California’s refining capacity—to raise pump prices in California and elsewhere in the United States.

The Golden State was once a global leader in drilling and production. Now it gets less than a quarter of its petroleum supply locally, despite having some of the largest untapped sources of oil underground and offshore.

“California is an oil-rich state,” said Caleb Jasso with the Institute for Energy Research. “It just severely limits how much they actually allow people to utilize their in-state domestic resources.”

California’s oil extraction has declined 66% since 1985. State-specific fuel blends that reduce emissions have provided much-needed cleaner air but also reduced demand for fuel. The California Energy Commission projected a production decline of 2% to 3% a year to match increases in fuel efficiency and the growth of electric cars, but the rate of decline has been about 15% recently, according to Catherine Reheis-Boyd, president and CEO of the Western States Petroleum Association. The state hasn’t issued a new drilling permit for more than two years. Analysts at Turner, Mason & Co. estimate at least half of California’s refineries, and possibly all but one in a worst-case scenario, could close by 2045.

“Anything that anyone does in California seems to be more expensive,” Reheis-Boyd said. “And then you have all the policies that the state has put into place. … Many organizations, not even just oil and gas, they’re really making some tough choices whether to stay in the state.”

Estimates of how much prices will likely increase at the pump in California next year range from $1 to more than $4 a gallon (double the current price). Patrick De Haan, head of petroleum analysis at GasBuddy, predicts price spikes of more than $1 a gallon outside the state if unexpected outages occur. California’s reduced refining capacity is likely to lead to higher prices for air travel, manufacturing, and agriculture products as well.

In 2020, Democratic Gov. Gavin Newsom signed an executive order aiming to end new gasoline-powered car sales in the state by 2035. That effectively discouraged continued refinery operations and long-term investments in the state. Newsom has also accused oil companies of price gouging. Faced with a long-term supply shortage, in April, he directed the California Energy Commission to work with refineries to prevent expected supply shortages.

“They’re floating the idea of trying to find somebody to buy one of these refineries, if not have the state itself take over it,” Jasso said. “They’re doing everything except taking accountability for a bad decision.”

It seems at least some regulators are grasping the reality of market dynamics. After reviewing supply and demand projections, the California Energy Commission on Aug. 29 postponed for five years imposing penalties on refiners who exceed state price caps on the amount above costs they’re allowed to charge for California-blend gasoline.

Meanwhile, Jasso said, “If you’re watching from outside of California, you’re seeing in real time what happens when the government picks and chooses the winners and the losers.”