With Valero announcing the pending closure of one of its two remaining California refineries, the state will lose at least 18% of its current refining capacity by the end of 2026.
Because California is an “energy island,” meeting demand for California and the parts of Nevada and Arizona that rely on its refineries will require costly imports of volatile fuel by emissions-heavy tanker ships.
California Gov. Gavin Newsom has long blamed rising gas prices on refiners’ “price gouging,” but even though his own administration has said that it has no found no evidence of such, he called a special legislative session last year to pass new refinery regulations that both Democratic and Republican governors of neighboring states warned would lead to price hikes and supply shortages.
Now, with the closure announcement, the warnings from the energy industry and regional leaders are coming to fruition.
These new regulations empower the state to determine when refineries are allowed to shut down for maintenance and set new inventory storage requirements that would require refineries to build vast new storage tanks to smooth out shortages.
With the state’s ban on the sale of new gas-powered cars in 2035, new refineries are not being built, leaving remaining refineries operating at nearly 100% capacity at all times. As a result, outages at even a single refinery result in spikes in gas prices.
Arizona Gov. Katie Hobbs, a Democrat, and Nevada Gov. Joe Lombardo, a Republican, sent a joint letter to Newsom urging him not to sign his new refinery regulations into law, citing their fear that they would lead to gasoline price spikes and shortages.
“It is evident that increased regulatory burdens on refiners and forced supply shortages will result in higher costs for consumers in all of our states,” wrote Hobbs and Lombardo. “With both of our states reliant on California pipelines for significant amounts of our fuel, these looming cost increases and supply shortages are of tremendous concern to Arizona and Nevada.”
Chevron, the state’s largest refiner, warned against the regulations’ impact on gas prices, and costly shift to seaborne imports, which were passed soon after it announced it was relocating its headquarters from California to Texas.
“We contend that enforcing a mandatory minimum inventory requirement will likely result in two negative outcomes: an increased frequency and duration of supply shortages, and a permanent rise in gasoline prices for consumers,” wrote Chevron. “Marine traffic and capacity face significant limitations currently and will encounter even more in the future due to Jones Act tonnage available … Policy that reduces in-state crude production will impact refiners’ marine capacity.”
Newsom’s director of the Division of Petroleum Market Oversight at the California Energy Commission has said that because California is a profitable area to run a refinery, that the regulations would have little impact.
“California is part of the most profitable area in the country,” said Milder at a state hearing while the governor’s regulations were under consideration. “There’s no reason that these companies cannot operate fairly with a bit more inventory and still make profit and stay in business.”
The string of recent closures suggest this is not the case.
In March, Phillips 66 announced it is closing its Los Angeles refinery, which refines 139,000 barrels of oil per day — 8.57% of state refining capacity — by October.
Soon after Newsom signed his regulations into law, Valero announced it would be considering the closure of its two refineries in the state, which process 230,000 barrels of oil per day, or 14.18% of the state’s refining capacity.
Now, Valero has announced that it is closing its Benicia refinery by the end of April 2026 and that it is evaluating “strategic alternatives for its remaining operations in California.”
The Benicia refinery’s 145,000 barrels per day of capacity is 8.94% of the state’s total. With the combined losses of the Los Angeles and Benicia refineries, the state will lose 284,000 barrels per day, or 17.41% of the state’s already-strained refining capacity.
California’s current refining capacity is 1.62 million barrels of oil per day, while its refineries use 1.4 million barrels of oil per day, meaning it currently has a relative surplus of 220,000 barrels of refining capacity per day, including its exports to Nevada and Arizona. However, with overall oil consumption at 1.72 million gallons per day, the state currently imports the difference.
With the two closures, the state will have only 1.34 million barrels per day of capacity, resulting in a 384,000 barrel per day, or 140 million barrels per year, necessitating the maritime imports referenced by Chevron.
Due to the Jones Act, shipping between U.S. ports must be done by U.S. built and crewed ships in rare supply due to limited American shipbuilding capacity. Congress found that in 2022, the United States had just five oceangoing commercial ships under construction, while China had 1,794. As a result, little maritime capacity exists to ship fuel from American refineries in the Gulf Coast, where refining capacity is plentiful, or from Washington state.
Washington’s excess capacity allows it to also supply Oregon, which has no refineries, but because it only refines a total of 246,200 barrels per day, cannot meet California’s growing shortfall.
So long as the Jones Act is in effect. this means most California replacement imports would have to be shipped across the ocean from abroad, subjecting Californians to higher prices and greater price volatility.
Because California and the parts of Nevada and Arizona required to do so use a special gasoline formulation specific to California, few refineries outside of California have invested in the equipment to produce the state’s fuel. This means few refiners are currently available to make up the shortfall, which could lead to gasoline shortages.
Before the announced closures, California energy expert Edward Ring warned that the state’s gasoline infrastructure was near its breaking point due to the shutdown of the Martinez refinery — which won’t be fully repaired until the end of the year.
“California’s regulatory assault on oil refineries – already irreplaceable because we require a special formulation for our gasoline — is driving them to cease operations. Production capacity barely exceeds demand,” said Ring on X. “One blip and we’ll have gas lines.”
The impact of California refineries on Arizona and Nevada gas prices became immediately apparent as prices spiked in the aftermath of the Martinez refinery’s temporary closure.
A 2024 state report outlined various policy options for increasing gasoline supply. One option presented was for the state of California to “purchase and own refineries in the State to manage the supply and price of gasoline,” ranging “from one refinery to all refineries in the state” in order to “eliminate potential market manipulation.”
California has the most heavily regulated gasoline sector in the nation. At $4.86 per gallon, California gasoline is $1.70 more than the national average, eclipsing $4.52 in Hawaii, which has the nation’s second-highest gas prices and must ship all its fuel from across the Pacific Ocean.
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