Brace for Impact: California Gas Prices to Increase in 2025

Policies have consequences. A significant increase in the retail price of gasoline that Californians will pay at the pump is expected for 2025. The projected increase could drive California’s retail gasoline prices to exceed the national average by as much as 62% by late 2025. The increase will contribute to inflation, add to the exceptionally high cost of living in California where only 16% of residents can afford to buy a home, and has a disproportionate and adverse impact on lower income Californians.

On November 8, 2024, the California Air Resources Board (CARB) passed new special blend mandates for California’s Low Carbon Fuel Standard (LCFS). The new standards require that refiners produce, and retail gas stations sell, a new California special blend in 2025. The CARB contends that the new special blend is necessary to achieve carbon and methane emission reduction targets and is consistent with Governor Gavin Newsom’s 2035 mandate to eliminate the sale of internal combustion car sales and 2050 targets. By its own admission, the CARB projected that the new special blend could increase the retail price of gasoline by $0.47 a gallon. However, in hearings, CARB staff noted that “Any estimate of cost from the LCFS regulatory proposal are inherently uncertain because they involve conducting estimates and speculative projections about what may happen in the future.”

When asked by KCRA about the impact of change on retail gasoline prices, the CARB simply stonewalled and did not respond.

A study by the University of Pennsylvania Kleinman Center for Energy Policy contradicts CARB estimates by estimating that retail prices could increase by $0.65 a gallon in 2025, $.85 a gallon in 2030, and $1.50 a gallon in 2035. Early modeling indicates that the regulation could have at least a $0.27 to $0.43 impact on the price of regular fuel. However, depending on the timing and costs incurred by refiners, wholesalers, and retailers to comply with the regulations, the impact on retail prices for regular grade gasoline could be significantly higher, ranging from $0.40 to $0.65 in year one, 2025. Most refineries perform major repairs, upgrades, and maintenance in January and February when demand is lowest and before they are required to transition to the summer seasonal blend, which has higher refining costs and higher retail prices. However, it is unclear at this time as to the cost of compliance, especially if refiners have to incur investments for new technologies, equipment and processes.

Notwithstanding the impact on consumers, the projected increase will have a positive impact on state and local taxes, which are pegged to the retail prices, thus increasing revenues to the governments.

For Californians, the increase in retail prices attributed to the adoption of new special blend standards is not the only regulatory action that will drive retail gasoline prices up in the Golden State. Looming in the background is the October 2024 passing of ABX2-1 requiring California oil refineries to maintain a ready-stock of finished gasoline will create additional costs for producers that must be factored into retail prices. Depending on the costs incurred by refiners for building or acquiring extra storage capacity and the amount of days’ supply that the refiners must maintain the addition to the retail gasoline prices could range between $0.047 to as much as $0.27 per gallon.

Policies have consequences, and within 72 hours of passing ABX2-1, Phillips 66 announced the closing of its Los Angeles refinery. The Phillips 66 LA complex refinery constitutes 8.3% of the total refinery capacity in California. Unless something significant or catastrophic happens, the demand for retail gasoline in California will not fall by 8.3% in 2025, and it is uncertain at this time as to how the loss of Phillips production will be compensated or offset. California has no in-bound pipelines, so crude oil stock and gasoline products must be shipped in via rail, truck or marine vessels…all of which are accretive to the retail price of gasoline and greenhouse emissions.

In consideration of diminishing supply and relatively stable demand, basic economics is that prices will increase. Early USC models indicate that the closure of Phillips 66 and loss of 8.3% of capacity could increase prices at the pump by $0.082 to $0.14 a gallon for regular grade gasoline by year-end 2025. The price increase will be more for premium grade. Additionally, the California excise tax on gasoline, which is indexed to the California Consumer Price Index, is scheduled to automatically increase on July 1, 2025, by roughly $0.011 to $0.018 a gallon from $0.599 to $0.619.8 Collectively, the increases in gasoline prices will have a compounding and inflationary effect throughout California’s supply chains for agricultural production, manufacturing, transportation, food and grocery items, building and construction, utility costs, and other services that are influenced by gasoline consumption.

The recent 2024 legislative and regulatory actions taken by California could result in a cumulative increase in the price of regular grade gasoline for the California consumer of $0.55 to $0.898 a gallon in 2025. For premium grades, the estimated range of increase could be $0.95 to $1.15 a gallon. And that does not include any increases in crude oil prices and the price of wholesale gasoline. Based on the average number of miles driven in California of 12,5249 and California’s average miles per gallon of 31 mpg, California regulatory and legislative actions could conservatively cost the California consumer an extra $222.00 to $449.00 a year for regular grade fuel, more for premium. To compensate for the expected increases in retail gasoline prices, the average Californian driving an internal combustion vehicle will have to earn an additional $600.00 to $1,000.00 a year in pre-tax income to “break even” with 2024 prices, depending on the grade of gas they purchase.

Policies have consequences and Californians must now…Brace for impact.