Key Takeaways
A new California law forcing refiners to build and maintain government-dictated inventories of product has resulted in the announced closure of a large refinery in Los Angeles, which will leave Californians with less fuel.
Californians are already paying about 50% more for gasoline than the rest of the country, and this requirement will exacerbate matters for California drivers.
Governor Newsom’s campaign against oil and gas has contributed to a 35% reduction in California’s oil production since he took office, even as other parts of the United States have reached record-breaking production.
The Phillips 66 L.A. refinery closure will make the 3rd closure in California in 5 years, all of which had made California’s unique gasoline blends mandated by the state.
The refinery closure will cost 900 families their jobs and drive up petroleum prices due to a reduction in California gasoline, jet and diesel fuel supply.
Phillips 66 has announced plans to close its major oil refinery in the Los Angeles area by late next year, which will negatively impact California’s fuel supply amid soaring petroleum prices that are currently about 50% higher than the national average. The refinery, which produces 85,000 barrels of gasoline and 65,000 barrels of diesel and jet fuel daily, employs approximately 600 workers and 300 contractors. It represents around 8% of California’s refining capacity across its two facilities, according to the state’s Energy Commission.
The announcement follows a day after California Governor Gavin Newsom signed legislation mandating that oil refiners maintain minimum fuel inventories and authorizing the Energy Commission to oversee plans to avert shortages during maintenance. Phillips 66 stated that it intends to continue operating in California and will collaborate with the state to meet fuel market demands.
This closure will exacerbate California’s fuel supply issues, which have already seen two other refineries shut down since 2020, including one operated by Phillips. The Phillips 66 Santa Maria refinery, located about 62 miles northwest of Santa Barbara, ceased operations in 2023 as the company transitioned its San Francisco-area site to a renewable fuels facility. Earlier this year, Phillips converted its Rodeo refinery to produce renewable diesel from fats and vegetable oils, moving away from traditional gasoline and diesel production. The company also runs a refinery near San Francisco that accounts for about 5% of California’s refining capacity, per the State Energy Commission. The other notable closure occurred in 2020 when Marathon Petroleum halted production at a Martinez, California refinery, citing low profits.
California’s geographic isolation from refining hubs in the U.S. Gulf Coast and Midwest means it must either produce all its motor fuels locally or import them, as it has unique environmental regulations beyond those mandated by the EPA. These specific requirements and elevated taxes have led to California having the highest gasoline prices in the country, with motorists paying approximately 46% ($1.47) more per gallon compared to the national average of $3.14, according to AAA. Over the past decade, stringent environmental regulations, including California’s cap-and-trade program and low-carbon fuel standard, have resulted in the closure of seven refineries in the state.
Newsom’s New Law Will Cause Prices to Increase
The recently passed law requires refiners to hold larger fuel inventories than the two-week minimum they currently maintain to avoid supply shortages and price spikes. Compliance will necessitate substantial investments, potentially amounting to hundreds of millions of dollars, as refiners will need to build and maintain additional inventory that must be replenished regularly, given that gasoline has a limited shelf life, as noted by the Wall Street Journal Editorial Board. These increased costs may drive other refineries to close, further straining supply and pushing prices up.
Under Newsom’s policies, California’s oil production has dropped by about 35% since he took office in January 2019, contrasting with increases seen across the nation. The governor has also signed a bill allowing local governments to block new oil wells. Furthermore, the California Air Resources Board (CARB) is set to enhance the state’s low-carbon fuel standard, requiring refiners to blend greater amounts of renewable fuels into diesel and gasoline. Last September, CARB projected that the new requirements could raise gasoline prices by 47 cents per gallon in the upcoming year, with other analysts forecasting even higher increases.
Philips 66 Has Legal Issues in California
On the same day Phillips 66 announced the Los Angeles refinery closure, a California jury found that the company had misappropriated confidential information from a potential acquisition to establish a competing renewable fuel business, ordering them to pay $604.9 million to Propel Fuels, a retailer of low-emission fuels in California. Phillips 66 has denied any wrongdoing and is considering its legal options.
The legal dispute began when Propel Fuels engaged Phillips 66 in 2017 about a possible acquisition to enhance its renewable fuel initiatives in California. Propel claims that after Phillips withdrew from negotiations in 2018, they launched their own renewable fuel line in 2019, allegedly using proprietary information shared during the discussions. The lawsuit, filed in February 2022, asserts that Phillips unlawfully utilized “trade secrets”, including financial and strategic data that represented 13 years of Propel’s development efforts, costing hundreds of millions of dollars.
Conclusion
The first consequence of California’s new minimum fuel inventory requirement is Phillips 66’s impending closure of its Los Angeles refinery, which provides 8% of the state’s fuel supply. This requirement will compel refiners to invest heavily in inventory management, which will need to be regularly updated due to gasoline’s limited shelf life. As more California refineries may shut down in light of this law and increasing regulatory demands, the pressure on fuel supplies and prices will likely intensify. Given California’s isolation from major refining centers and unique environmental criteria, it must either produce all its motor fuels locally or import them, resulting in the highest gasoline prices in the nation.
