For decades, Californians have been accustomed to higher gasoline prices compared to the rest of the United States.
However, new forecasts indicate that these prices may escalate even further in the next year or two.
The closure of a major refinery in the state by the end of this year and another set to shut down in 2026 has raised concerns about tightening fuel supplies, which could result in escalating gas prices.
A study conducted by a business professor at the University of Southern California has even predicted that gas prices in California could potentially reach over $8 a gallon by the end of 2026, though some experts have contested these figures.
One of the significant closures impacting supply is Valero’s refinery located in Benicia, Northern California, which is set to close next year.
Valero’s CEO, Lane Riggs, attributed this decision to the extremely stringent and complex regulatory environment in the state.
California has been pursuing policies aimed at moving away from fossil fuels for the past two decades, leading to a challenging operational landscape for oil refineries according to Riggs.
This announcement comes closely on the heels of Phillips 66 revealing plans to shut down its Southern California refinery operations in Carson and Wilmington by year-end.
Compounding these closures is a decline in gasoline consumption by California drivers.
The major factors contributing to this trend include lingering effects from the work-from-home practices adopted during the COVID-19 pandemic and the increasing adoption of electric vehicles that operate independently of gasoline.
Stillwater Associates transportation energy consultant, Leigh Noda, points out that the anticipated loss of gasoline supply may outstrip the declining demand.
In addition to Valero and Phillips 66, two other refineries have shifted focus to producing renewable diesel and sustainable aviation fuels since 2019, further reducing gasoline production capacity.
According to Noda, closures of these refineries are occurring faster than the rate at which gasoline demand is decreasing, creating a looming supply issue for California’s drivers.
Valero and Phillips 66 collectively account for nearly 18% of California’s crude oil production capacity, making their closures particularly concerning.
With the remaining refineries operating near full capacity, there is little room for increased gasoline output to compensate for these losses.
The California Energy Commission reports that as of 2024, approximately 63.5% of oil supplied to the state’s refineries is sourced from international markets.
As a result of these closures and the unmatched supply-demand dynamics, experts anticipate that gasoline prices in California will inevitably rise, though exact predictions on how much remain elusive.
Californians have long voiced grievances over the state’s elevated gas prices.
As of last Friday, the average price for a gallon of regular gasoline stood at $4.86, significantly higher than the national average of $3.19, reflecting a $1.67 difference.
The Golden State has also witnessed steep price surges, with recent jumps pushing prices above $6 per gallon in late summer and autumn of both 2022 and 2023.
In response to these persistent price challenges, Governor Gavin Newsom has accused oil companies of exploiting consumers and profiting at their expense.
This catalyzed the passing of Senate Bill X1-2, which established the Division of Petroleum Market Oversight tasked with monitoring the state’s oil and gasoline industries.
This legislation empowers the California Energy Commission to impose penalties on oil companies that exceed a designated “maximum gross refining margin,” although the enforcement particulars are still being finalized.
A spokesperson for Newsom noted that since the gas price gouging law came into effect, California has experienced fewer drastic price spikes, suggesting that these new measures are working.
Moreover, Newsom has underscored the importance of California refineries maintaining a minimum gasoline inventory to dampen the potential for future price spikes, with penalties ranging from $100,000 to $1 million per day for non-compliance.
In light of Valero’s planned closure, Newsom has directed state energy officials to collaborate closely with refiners to guarantee a safe, affordable, and dependable supply of gasoline for Californians.
Notably, there has been a marked shift in Newsom’s tone towards the oil industry, urging regulators to ensure refiners remain motivated to serve the California market, even amid a transitional phase towards cleaner energy.
In early May, University of Southern California management professor Michael Mische released a white paper warning of potential spikes in gasoline prices due to refinery closures coupled with state regulations and taxes.
Mische’s projections suggest gas prices could soar to between $6.045 and $8.435 per gallon by the end of 2026.
He highlighted California’s persistent supply issues, which have historically required the state to import gasoline during high-demand periods—a situation that may worsen with the current refinery closures.
In response, Newsom’s office dismissed Mische’s findings as speculative, questioning the underlying assumptions and data behind the estimates provided.
They also raised concerns regarding Mische’s previous consulting work with Saudi Arabia, suggesting a possible conflict or bias.
In a defense of his report, Mische maintained that his consulting efforts were unrelated to petroleum issues and labeled the criticisms as attempts to discredit his academic contributions.
As summer approaches, fueled by the Memorial Day weekend—a typical start of the driving season—Patrick De Haan, the head of petroleum analysis at GasBuddy, anticipates a slight decrease in gas prices if no unexpected refinery outages occur.
Currently, the average price in the San Diego area has stabilized at around $4.77 per gallon.
De Haan is hopeful that prices could settle in the mid-$4 range, perhaps even dipping lower if market conditions remain favorable.
However, De Haan remains cautious about the longer-term outlook for gas prices in California, suggesting a negative trajectory similar to that of a credit rating agency like Moody’s.
With refinery closures coinciding with changing market dynamics and ongoing demand shifts, California’s gas market faces uncertain and potentially higher prices in the near future.
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