California Facing $8.43/gallon Gas – a 75% Increase – as Refineries Close

“California can ill afford the loss of one refinery, let alone two,” says USC Professor Michael Mische in a new report warning of an impending gas crisis this summer.

“In 1982, California satisfied 62% of its petroleum needs from in-state oil producers,” says Professor Mische. “Since 1990, California’s imports of petroleum from non-U.S. producers have increased by a staggering 713%. While California was becoming more dependent on foreign sources, the overall U.S. became less dependent.”

In March, the Globe reported on a study also by Professor Mische which found that the factors contributing to California’s high gasoline prices over 50-years are self-imposed by state officials and politicians. It turns out that California is its own worst enemy.

In April we reported that California’s average price for a gallon of gas was $4.918, while the national average cost for a gallon of gas was $3.260. In Texas that same gallon gas cost $2.87.

Oil and gas and California refiners “have not engaged in widespread price gouging, profiteering, price manipulation, ‘unexplained residual prices’ or surcharges, magical or otherwise,” Professor Mische said in the March report.

Now Mische warns that California gas prices could escalate 75% to $8.43 per gallon in 2026 due to the pending shutdowns of two major in-state refineries.

Today, Tuesday May 6, 2024, a mid-grade gallon of gas is already high at $5.00 per gallon on average in California, while the U.S. average is $3.64 for that same mid-grade gallon of gas. The national average for regular gas is $3.158 per gallon; California is $4.783 per gallon; Texas is $2.761 per gallon.

In his latest analysis of California’s oil and gas industry, Prof. Mische says “the pending shutdown of the Phillips 66 refining complex in Los Angeles will reduce daily refining capacity by 8.9%. The loss, although painful in terms of its impact on consumer prices, is absorbable and the deficit in production and gasoline levels will be compensated by imports of finished fuels from Washington State and perhaps Gulf Coast refineries. 

Professor Mische warns:

“Multiple models indicate that the shutdown of the two California-based refineries could possibly place the Golden State in a precarious economic situation and create a gasoline deficit potentially ranging from 6.6 million to 13.1 million gallons a day, as defined by the shortfall between consumption and production.”

“Reductions in fuel supplies of this magnitude will resonate throughout multiple supply chains affecting production, costs, and prices across many industries such as air travel, food delivery, agricultural production, manufacturing, electrical power generation, distribution, groceries, and healthcare.”

Also in April, trying to sound the alarm that a gas crisis was imminent, the Globe reported, “In another blow to California’s oil and gas industry, and the state’s fuel; supply, Valero Energy Corporation announced Wednesday it will shut down its Benicia Refinery in April 2026.

“This latest hit comes after Chevron Oil Company announced in August their corporate relocation to Houston Texas from the Bay Area, and Phillips 66 announced that its Los Angeles refinery will shut down by October 2025.

“Valero’s announcement that it will shut down its Benicia refinery in April 2026 is yet another blow to California’s already fragile fuel supply system,” the California Fuels & Convenience Alliance said. “The decision reflects the growing impact of California’s increasingly aggressive energy policies, which have made it more difficult for in-state refineries to continue operating. As a result, this closure will leave the state with just seven remaining in-state refineries capable of producing California’s uniquely formulated gasoline—a dangerously low number for a state of nearly 40 million residents.”

Prof. Mische continues:

“Additionally, a reduction in gasoline production and related price increases will likely have a dragging effect on the growth of California’s GDP, and have a significant impact on the affordability of living in the Golden State, as well as personal and household spending patterns and saving behaviors. The loss of in-state gasoline production will also adversely affect corporate and personal income, sales, and excise tax revenues at a time when California’s budget deficit is estimated to be as high as $73 billion, and state and local government debt at $1.6 trillion.”

How did California fall from fourth in the world in oil production to shutting down refineries and chasing Chevron out of the state?

“California was once a global leader and ranked fourth in the world in oil production. Today, California accounts for only around 2.5% to 2.7% of all U.S. crude production and is producing only 23.7% of its own in-state needs. For the 1982 to 2023 period, in-state oil production fell by 69% from its peak high in 1985 (398,280) to a historic low in 2023 of 123,947,” Prof. Mische says. “To make up for the shortfall of in-state gasoline production and to ensure consistent and relatively affordable prices for the consumer, California will most likely have to look to the Gulf Coast refiners, and to Asia, including refineries in South Korea and China, as possible sources to satisfy consumer demands and fuel its economic growth. As a consequence of the two refinery closings, California will be at the mercy of out of state and foreign, non-U.S. refiners.”

What does the U.S. do with such a rogue state that has the oil and gas production capabilities California has, but is sabotaging its own oil and gas production through stifling regulations, fines, and excessive taxes?

We know who is responsible – Gov. Gavin Newsom, his appointed administrative deep state, and complicit elected Democrats.

“We’re not just losing gas. We’re losing jobs, losing local economies, losing our grip on affordable living in California, and losing a critical layer of our national security,” said Senate Minority Leader Brian W. Jones (R-San Diego) in a letter to Governor Gavin Newsom.

“The letter also points to the Governor’s excessive regulations and financial burdens on gasoline producers, including SBX1-2, ABX2-1, and changes to the Low Carbon Fuel Standard, which have made it increasingly difficult for refineries to remain operational. To prevent refinery closures and ensure long-term energy stability, Leader Jones recommends the governor work directly with California’s fuel producers to find immediate solutions, which could include exploring investment tax credits and temporary or permanent relief from certain taxes and regulations.”

“Even if the surviving California refineries, which are some of the most sophisticated in the world,  increased their production of California compliant gasoline, the increase would not completely compensate for the loss of two refineries,” Prof. Mische says. “California’s consumption of gasoline, which has declined by 11% since 2001, is not expected to suddenly drop by 20% in the next twelve months to achieve equilibrium with the shortfall of in-state gasoline production.”

What can be done to remedy this self-imposed inevitable gas crisis?

“California mandated regulatory fees, costs, and taxes are the highest in the U.S. and add $1.47 to a gallon of gasoline,” Prof. Mische says. That is an additional $30 for a 20-gallon fill-up. “Even without the loss of two of its most important refineries, California regulatory actions could potentially increase the price at the pump by $1.182 a gallon” – to $2.652 per gallon in California taxes on top of the gas price?

Professor Mische shares the potential consequences of the closure of two of California’s refineries summarized: 

1. California in-state refinery production may decline by as much as 20.95% from 2023 levels to April 2026.
2. California in-state gasoline production may decline from 34.460 million gallons a day in 2023 to 27.242 million gallons a day by calendar year-end 2026.  
3. Based on current assumptions and estimates, the result of the closing of two refineries, given static consumption (demand), the potential shortfall, as defined by the difference between California refinery production and California in-state consumption, could possibly range between 6.6 million gallons a day by calendar year-end 2025, to as much as 13.1 million gallons by calendar year-end 2026, depending on production mix and conversion ratios and other factors (demand).
4. If California’s surviving in-state refiners increased production by as much as 10%, they would not be able to make up the estimated shortfall due to two refineries closing based on estimated demand and consumption.
5. Based on current demand and consumption assumptions and estimates, the potential consequences of the Phillips 66 refinery closure scheduled for October 2025, the estimated average consumer price of regular gasoline in California could potentially increase by as much as 33.6% from the April 23, 2025, price of $4.816 to $6.045 to $6.433 a gallon by calendar year end 2025. We can expect retail prices to be even higher in counties such as Mono and Humboldt.
6. Based on current demand and consumption assumptions and estimates, the combined consequences of the 2025 Phillips 66 refinery closure and the April 2026 Valero refinery closure, together with the potential impact of legislative actions such as, but not limited to, the new LCFS standard, increase in excise taxes, Cap and Trade, SBX1-2, and ABX2-1, the estimated average consumer price of regular gasoline could potentially increase by as much as 75% from the April 23, 2025, price of $4.816 to $7.348 to $8.435 a gallon by calendar year end 2026. We can expect retail prices to be even higher in counties such as Mono and Humboldt.

As Prof. Mische states, “Regrettably, the issue of refinery operations in California is no longer restricted just to profits, and it is naïve to think so. Refiners know how to operate. The issue is the California operating environment.”

Ten Action Steps That California Can Take to Ensure Gasoline Security and Lower Prices for Consumers

1. The most obvious action would be to approach both Phillips 66 and Valero refiners with a compelling business proposition to remain in California. However, both refiners have taken balance sheet and income charges in excess of $1.0 billion as related to their planned closures, and it is doubtful that the State could craft a “stay put” plan to compensate for the write-offs and increasing operating costs.

2. Immediate revocation of Executive Order N79-20, banning the sale of new gasoline powered (internal combustion engines) vehicles in California, which is scheduled for 2035, with a rollback of the ban to 2055. The imposition of this mandate is tantamount to a death sentence on California oil producers, refiners, the 10,957 gas stations (most of which are independently small business owned and operated), some 124,000 station employees, and consumers. Secondly, the imposition is a sinister way of limiting consumer choices and forcing consumers to convert to vehicles and technologies that they may not want or have a preference to adopt.

3. Immediate suspension of CARB’s new LCFS that was introduced in late 2024, and a five-year adaptation of the 2024 CARB standard to help refiners stabilize production costs. According to its own estimates, the CARB’s mandatory conversion to the new LCFS could increase retail gasoline prices by $0.47 a gallon. University of Pennsylvania studies indicate over $1.15+ a gallon, and my estimates of $0.62 a gallon.

4. Immediate elimination of the artificial profit margin cap imposed on refiners by SBX1-2 and the DPMO of the CEC. The imposition and enforcement of a margin/profits cap restricts the refiner’s ability to invest in new technologies, additional capacity, discretionary maintenance, and repairs, as well as plan for the optimal deployment of capital in the interests of both consumers and shareholders. 

5. Immediate rollback of the California State Excise Tax on gasoline to the national average of around $.33 a gallon. The excise tax, which is indexed to the California Consumer Price Index, is scheduled to automatically increase on July 1, 2025. Over the past 40 years, California’s annual inflation rate has been greater than that of the overall U.S. and indexing the excise tax has been a clever way of increasing a component of retail gasoline prices. The increase is expected to add another $0.0185 to $0.023 cents a gallon on July 1, 2025, bringing the total excise tax to $0.633 a gallon. A rollback in the excise tax would have an immediate favorable impact on consumers.

6. A temporary suspension on ABX2-1 requiring refiners to produce, store, and finance surplus gasoline inventories. California currently maintains around a 14-day supply of finished fuels and is at 85% plus of its existing storage capacity. The imposition of additional days’ supply of gasoline will increase refiner holding costs for inventories. Those costs will most likely be reflected in the everyday price of gasoline at the retail pump. Depending on the grade of gasoline, seasonal blend, production schedule, and importantly, the number of days required to be held as surplus inventory, the cost could add anywhere from $0.044 to $0.057 a gallon. A suspension would have an immediate impact on lowering consumer prices.

7. A capitation of $0.65 a gallon on the Cap and Trade and other environmental fees and costs to refiners, which are ultimately reflected in the consumer price at the pump. Since its imposition in 2015, Cap and Trade have added substantial cost to the retail price of gasoline in the Golden State. A capitation of Cap and Trade, as related to gasoline prices would reduce retail prices for the consumer.

8. As of December 2023, California holds around 1.5 million barrels of oil in proven reserves or around 3.1% of all U.S. proven reserves, ranks fifth largest oil reserves in the U.S., ranks 7th in oil production among 32 oil-producing states, and is home to the Monterey shale reserve. Confronting the potential for severe shortfalls in gasoline supplies and increasing prices, it is an appropriate time for California to readdress and relieve the restrictions on in-state petroleum production and encourage in-state producers to increase California oil field production. 
   1. Create Enhanced Production Zones by reducing regulatory restrictions on current in-state oil production operators, with particular emphasis on increasing California field production in Kern and Santa Barbara counties. 
   2. Enact specific legislation requiring California producers operating in the state to “sell first” to in-state refiners as a condition for ITC qualification. 

9. Provide for a refinery specific “investment tax credit” (ITC) somewhat similar in form to that designed and enacted by President Kennedy to provide California oil producers and refiners a 15% tax credit for every dollar of capital invested in additional oil and gasoline production, storage, and transportation capacity (pipelines).

10. Suspend, delay or nullify any enactment of AB-1866, AB- 2716, and AB-1448 eliminating the use of older and least utilized wells or the rehabilitation of older and underutilized wells and SB-1122 on restrictions.

Prof. Mische concludes, “California, or more appropriately, the people and businesses of California, may have to look to the Federal Government for price relief and gasoline security. One action could involve a Presidential Declaration or Order specifying California refineries as national security assets. Another could be the designation of California refineries as essential assets for the Department of Defense.”

Read Prof. Mische’s entire report here: