Ringside: What Will California Gas Prices Do in 2026?

About the time it became inevitable that California was going to lose two major refineries, in May of last year, an alarming study was released by Michael Mische, an economist and business professor at USC. In his analysis, “Ensuring California’s Gasoline Security for the 21st Century,” Mische made a prediction that was widely quoted:

“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, 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.”

In a less disseminated quote, more ad hoc, but equally consequential, Democratic candidate for governor Tom Steyer said this in a recent debate:

“Monopolies and small combinations of businesses control prices. In the case of gasoline, we’re held hostage by a very small group of companies that control refineries and push these prices up all the time. For us to get lower gas prices, we need to find competition. We need to import gasoline either from neighboring states like Washington, or we need to buy it from Asia and ship it; refine it there and ship it to us.”

So what’s actually going to happen, now that California’s in-state capacity to process crude oil has dropped from 592 million barrels per year down to 488 million barrels per year, when in 2024 the demand for crude oil in California was 511 million barrels per year? It doesn’t take an economist to see that we now have a 5 percent shortfall in capacity. In a healthy supply environment, taking into account refinery downtime just for routine maintenance and upgrades, it is prudent to operate with a 10 percent surplus. That’s a huge gap.

So can imported gasoline compete with refined gasoline?

To begin with, there are several components in the retail price of gasoline that are the same regardless of the source. They would include costs for CARB/LCFS (low carbon fuel standard) compliance, taxes and regulatory fees, “secondary distribution” (getting the gasoline from the refinery or terminal to the actual gas stations), and the retail station’s profit margin. Altogether these four costs contribute about $2.00 to the price per gallon of gasoline in California.

We can quibble over this number, with lower estimates around $1.75 and higher estimates around $2.30 per gallon, but that doesn’t change the fact that every gallon of gasoline sold in California will have these same cost components included in the price. The origin of the gasoline is irrelevant.

Working through the remaining chain of costs starting with the price of crude oil, the range of prices don’t vary much between what California refineries pay vs. CARB compliant refineries on the Gulf Coast or in Asia. At most, California’s refineries are paying $0.15 more per gallon, at the least, their current price for crude oil inputs is exactly the same at around $1.50 per gallon. Prices for crude oil are held within reasonable percentages by a competitive world market, preventing significant differences between the price of in-state versus imported refined gasoline.

This brings us to the two variables that are most likely to affect how much of a retail price impact we will have due to gasoline imports making up for lost in-state refinery capacity. They are the actual operating costs and profit margins per gallon at the refineries, and the shipping costs to get the gasoline to California.

Making this determination is not easy. Sources are scattered and data varies by location. But we know that California’s refineries are paying around $1.50 for the crude oil within each gallon of gasoline, plus around $2.00 per gallon for those components of the price that will stay the same no matter where the oil comes from. From that base of $3.50 per gallon we add refinery operations and profit, plus shipping costs to the retail distribution points. According to the American Automobile Association, the average retail price for gallon right now in California is $4.58 per gallon. This means that when we refined 100 percent of our gasoline right here, in-state refining and shipping costs added about one dollar to the price at the pump.

And so it comes down to this: once they’ve purchased the crude oil at a world price, can out-of-state suppliers refine and ship gasoline from overseas for under one dollar per gallon?

The short answer is no, but a more nuanced answer is, no, they cannot, but it doesn’t appear that the difference is going to mean $8.00 per gallon gas. Foreign refineries can operate for less than California refineries for reasons that ought to give pause to the overzealous state regulators who are chasing them out of the state. Obviously you’re going to pay less for refined gasoline if you buy it from nations that have minimal environmental safeguards and cheap labor.

While we may assume imported gasoline will have a lower refinery cost, we may also assume shipping costs to transport gasoline 12,000 miles from, say, Gujarat on the Arabian Sea to Benecia on the Pacific Coast are going to be far greater than shipping from in-state refineries to distribution points also located in California. But shipping, based on available data, is not that expensive. Actual shipping can be as low as $0.15 per gallon, but you have to add to that costs for loading and offloading, insurance, port charges, and other surcharges, tolls, and ancillary port costs. In no scenario, however, does the total shipping cost exceed $0.70 per gallon.

All of these estimates, however, depend on a smooth transition. Those difficulties are mitigated by a few factors. The amount of California’s insufficient refinery capacity is less than 10 percent of likely demand, meaning that it is not an overwhelming amount of gasoline that has to be imported. The port facilities that previously imported crude oil, at Benecia in particular, can be adapted to receive gasoline instead. That’s not easy, but it isn’t starting from scratch, either. And, finally, California’s governor is not going to allow $8.00 gasoline to derail his presidential ambitions. He will do everything in his power to contain gasoline price hikes, including turning down the state’s regulatory assault on the state’s remaining producers and refiners.

When it comes to how much gasoline is going to cost in California this year, there are two not-so-encouraging conclusions we can reach. First, while the price increases may not be as extreme as some have predicted, they will come on top of what are already the highest prices in the continental United States. These high costs for gasoline harm businesses trying to stay competitive, and they wreak havoc on working families that have long commutes.

Just as bad is what California’s policymakers have done to the state’s oil industry. The drillers, the distributors, and the refineries, have all built the most environmentally responsible operations on earth. They’ve also created hundreds of thousands of jobs that are now being relentlessly eliminated for the petroleum equivalent of sweatshops overseas. The indifference our politicians have displayed towards these victims of their zealotry is hard to forgive.