California’s Refinery Closures and Regulatory Requirements Lead to Higher Gasoline Prices

     California has long been known for its high gasoline prices. Now those prices may rise significantly higher than they already are. A news story from December predicted $8 per gallon of gas, and another from this month suggested $12 per gallon. Other predictions show a more modest gas price increase of a dollar or two, but all show increases. Shut-downs of two California refineries, Phillips 66's Los Angeles-area facility, which ceased operations in the fourth quarter of 2025, and Valero's Benicia refinery, which has just shut down, are the cause of concern. These two refineries represent 17-20% of in-state refinery capacity. According to that December story in the Santa Monica Observer:

“Refiners cite a mix of factors for the exits: declining demand, high operating costs, and California's stringent regulations, including emissions standards and recent laws empowering regulators to manage maintenance and stockpiles. Phillips 66 framed its decision as a business choice amid market dynamics, while Valero highlighted regulatory pressures and fines.”

     California is one of the biggest gasoline markets in the U.S. It is second only to Texas in fuel consumption. The loss of the two refineries is expected to result in about 284,000 barrels per day of oil not being refined at full capacity. Up to 1300 jobs will be lost due to the shutdown of the refineries. Apparently, state officials have pleaded with Valero not to shut down, but the refinery ended up shutting down ahead of schedule by a few months, possibly exacerbating the problem.

     An article in the New York Post notes:

“Refineries are fleeing the Golden State as regulations drive operating costs 26 to 37% higher than the national average. Chevron moved its operations from the Bay Area to Texas, while Phillips 66 powered down its 140,000-barrel-per-day Los Angeles refinery in October.”

     Now the state must rely on imported fuel that must meet its unique regulatory standards.

     According to an article in Fox Business:

“Critics argue that years of regulations and penalties have discouraged long-term investment in refining infrastructure, accelerating closures and amplifying price swings for consumers. Supporters of the policies counter that refinery shutdowns align with the state's broader environmental and climate goals.”

     To me, it sounds like the supporters are supporting shooting themselves in the foot.

     An article in Money Wise quotes state Republican Rep Vince Fong:

“We have an energy crisis in our state, and it looks like it is only going to intensify,” he said, adding that reduced refining capacity could drive up fuel prices while also affecting California’s military supply chain. What appears to be a consumer issue, he said, could quickly become a national one.

     The West Coast is isolated from other major refining hubs, such as the Gulf Coast, making it harder to replace lost supply when refineries shut down. More from the Money Wise article explains Valero’s predicament and why they are leaving. They have no plans at this time to try to sell the refinery.

“During the company’s most recent earnings call, CEO Lane Riggs described California’s regulatory and enforcement environment as “the most stringent and difficult of anywhere else in North America."

“One example is California’s Low Carbon Fuel Standard, which requires fuel producers to steadily reduce the carbon intensity of gasoline and diesel based on emissions across a fuel’s full life cycle. While the policy is designed to cut greenhouse gas emissions and improve air quality, it also adds compliance costs for refiners operating in an already constrained market.”

“In October 2024, regulators imposed nearly $82 million in fines on Valero for toxic chemical releases and other violations at the site. It was the largest penalty ever issued by the Bay Area Air District, ABC7 reported.”

     It basically sounds like they were pushed out and economically injured to the point where it became no longer economically viable to operate the refinery.

     According to an article in The Center Square, Valero will continue to operate its other California refinery and also use the other refinery to import refined oil, essentially using it as a tank farm for imported refined products such as gasoline. University of Houston Energy Fellow Ed Hirs told the Center Square:

“In California, it is expensive to produce the oil. It’s difficult to transport the oil, and it's increasingly more expensive to refine it,” said Hirs. “The refineries must operate under environmental restrictions that it doesn't compensate anyone to rebuild, refurbish them, because in some cases because they are as much as a hundred years old and it would be expensive."

“Hirs said higher prices paid by California’s drivers will be borne disproportionately by the working poor, who need their vehicles to get to work and farm their lands. The costs of gasoline make up a large percentage of the expenditures of those with low incomes, and their personal finances are sensitive to higher gasoline prices, he said.

     The article goes on to point out potential plans to pipe in more California-grade gas through a reversed segment of a pipeline.

“Phillips 66 and midstream oil and gas company Kinder Morgan are considering a joint venture, called the Western Gateway Pipeline Project, that would pair a 1,300-mile-long pipeline running from Borger, Texas, to Phoenix with a reversed segment of the existing Santa Fe Pacific West system, which could deliver refined fuels to Southern California, according to Industrial Information Resources, an industry publication.

“Brian Mandell, head of marketing and commercial operations at Phillips 66, said in a recent quarterly earnings call that his company will continue to import barrels into California by sea. But he added the Western Gateway project could serve the California market. “All our Mid-Continent refineries can make Arizona-grade gasoline and California-grade gasoline. So we see the pipeline as a great opportunity for California, for Arizona, for Nevada and for all the potential shippers."

“California may not reduce pollution overall by adopting policies that lead refiners to process oil outside the state and then import by pipeline, said Hirs. “Through the state’s policies, California isn’t reducing pollution much, they're just outsourcing it to someplace else."

“California’s drivers pay the nation’s highest taxes and fees on gasoline, which amount to approximately $1.30 of each gallon purchased. This compares with 20 to 30 cents per gallon in most states in the South and Midwest.

     This is another example of environmental goals not leading to fewer emissions. However, there is one area where it may be an improvement. California has unique air quality challenges, and refineries are major air polluters. Thus, outsourcing those emissions means improvements in local air quality. While that may degrade air quality in the outsourced areas, they are not likely to suffer from the weather inversion susceptibility of California, which degrades local air quality even more.

     This is also one of several climate issues that can potentially sink Newsom's presidential bid.

 

     

References:

 

California gas prices expected to jump even higher as Valero closes refinery. Anna Young. New York Post. February 4, 2026.  California gas prices expected to jump even higher as Valero closes refinery

California 'truly at a breaking point,' state senator says as refineries close and gas prices surge. Arabella Bennett. Fox Business. February 11, 2026. California 'truly at a breaking point,' state senator says as refineries close and gas prices surge

Valero Refinery Closure Sparks California's Unprecedented Energy Crisis. Business Honor. February 5, 2026. Valero Refinery Closure Triggers California Energy Crisis

California Refineries to Shut Down by 2026, Impacting Capacity. Here Los Angeles. August 25, 2025. California Refinery Closures Impacting Oil Capacity

NY Times, Others Say California Refinery Closures Will Lead to $8 a Gallon Gasoline by the Summer of 2026. David Ganezer. Santa Monica Observer. December 23, 2025. NY Times, Others Say California Refinery Closures Will Lead to $8 a Gallon Gasoline by the Summer of 2026 - Santa Monica Observer

Lawmaker warns California’s oil and gas crisis is a major US security threat as Valero set to flee in 2026. Can residents handle $12/gallon next year? Victoria Vesovski. Money Wise. February 11, 2026. Lawmaker warns California’s oil and gas crisis is a major US security threat as Valero set to flee in 2026. Can residents handle $12/gallon next year?

Valero begins shuttering Bay Area refinery, will import fuels. Alton Wallace. The Center Square. February 11, 2026. Valero begins shuttering Bay Area refinery, will import fuels