Key Takeaways
California has declared war on the oil and gas industry that makes up much of its rich history.
In its pursuit of climate and other goals, California is in the process of dismantling the oil industry, despite promising geology on and offshore.
Because California incentivizes refineries to convert to biofuels among other regulations, the state has lost 11 percent of its petroleum refining capacity.
Californians are paying close to $2 more per gallon for gasoline than the rest of the nation as the state requires boutique gasoline blends that are only produced within the state.
California is planning to impose a “maximum refining margin” which will have the effect of shutting down investment in the refining business, exacerbating the problem.
Californians can expect gasoline prices in the state to rise as its policies are pushing oil companies out. A century ago, California’s oil production made it the fourth-largest oil producer in the United States, producing hundreds of oil drillers, including some of the largest still in existence. The two largest U.S. oil producers, ExxonMobil and Chevron, however, are writing down a combined $5 billion of California assets in the fourth-quarter. Last year, Exxon Mobil exited onshore production in the state, ending a 25-year-long partnership with Shell when they sold their joint-venture properties—the sale of Aera to German asset manager IKAV for $4 billion. The state’s regulatory environment impeded efforts to restart offshore production, leading to Exxon’s exit that includes financing a Texas company’s purchase of its offshore properties. Exxon is officially ending five decades of oil production off the coast of Southern California.
While Chevron is staying, it is contesting state regulations on its oil producing and refining operations. Chevron has a 145-year history in California, and was originally known as the Pacific Coast Oil Company. According to Chevron, California’s energy policies are making it difficult to invest, even for renewable fuels. The company pumps oil from fields developed 100 years ago, but has cut spending in the state by hundreds of millions of dollars since 2022.
The latest reason for the company’s ire is a proposal to establish a maximum refining margin in the state. It is already difficult for Chevron to justify growth projects at its two California refineries, which account for about 30 percent of the state’s capacity, because of plans to end sales of internal combustion engines in the state by 2035. A law that would effectively cap refinery profit would make them practically impossible to operate economically. To take advantage of state incentives, Chevron, Marathon Petroleum and Phillips 66 have been converting refineries away from gasoline, diesel and jet fuel to renewable fuels, contributing to an 11 percent reduction in California’s refining capacity during the past decade.
California drivers paid an average of $4.94 per gallon of gasoline in the last quarter of last year vs. $3.22 for the national average, partly because the state’s low-carbon fuel standards have encouraged refineries to convert from petroleum to renewable diesel, which will reduce gasoline supply and raise prices further. And laws and regulations against refineries could result in a reliability and shortage problem for Californians, who must refine their own gasoline due to the state’s boutique fuel requirements. Chevron personnel feels that California politicians are playing a dangerous game.
California’s Numerous Laws and Regulations Against Oil Production and Refining
Beginning in the 70s and 80s, California state set curbs on oil drilling near homes and businesses and regulations on emissions more strict than federal ones. In 1996, California introduced reformulated gasoline to lessen smog, developing the country’s most stringent and costly environmental standards. This has made California into a “fuel island,” since gasoline produced in neighboring states does not meet California state requirements for the fuel.
Since 2019, California Governor Gavin Newsom added many more laws and regulations against oil production and refining. He called for the state to ban sales of new gasoline-powered vehicles by 2035. In 2022, California passed a law banning oil and gas drilling within 3,200 feet of structures including homes, schools and hospitals despite oil production being there first in many cases. Last year, California regulators approved a plan to reduce the state’s carbon-dioxide emissions by 85 percent from 1990 levels by 2045, including a reduction in oil and gas consumption to less than one-tenth of current demand. Last September, Newsom’s administration filed a lawsuit targeting the oil industry for “lying to consumers for more than 50 years” about climate change. He signed into law a bill seeking to hold Chevron and other refiners liable for allegedly price-gouging consumers. In the first half of 2023, drilling permits dropped from 200 a year earlier to just 7.
Oil in Decline in California
Oil production in the state has been on a steady decline for almost four decades. Oil production, including at historic Kern County fields in southern California, is off by a third since its 1.1 million-barrel-per-day peak in 1985. The state has lacked new oil development projects and the legacy fields that produce heavy oil have not been suitable for state mandates for its gasoline. As of September, more than 50 percent of oil drilling permits issued to companies have gone unused. Unemployment in oil producer Kern County is at 7.8 percent, compared with the overall 4.9 percent average for the state. California’s high-tech industry long ago replaced oil as the state’s major employer.
Conclusion
Big oil is exiting California as regulators and politicians are making it difficult for them to invest and operate in the state. Since Californians are dependent on a boutique fuel for their gasoline that is only refined in the state, the situation could result in reliability problems and shortages. State incentives have resulted in 11 percent of California refineries converting to renewable diesel, which will result in a reduction in gasoline production. The situation is dire for oil producers, refiners and particularly Californians, who are dependent on their vehicles for work and pleasure.
