California Oil Industry: Refinery Closures, Pipeline Shutdowns, and the Road Ahead

California

Feb 3

California Oil Industry in Transition: Refinery Closures, Pipeline Shutdowns, and the Road Ahead

Executive Summary

California's petroleum sector is undergoing a structural transformation that is reshaping how oil is extracted, transported, and refined across the state. With major refinery closures eliminating approximately 17-20% of in-state capacity, critical pipelines shutting down, and an accelerating shift toward imported fuels, the state faces significant near-term price volatility and supply uncertainty. Governor Newsom has responded with a multi-pronged strategy including expanded drilling permits, new fuel blends, and regulatory tools to stabilize prices.

Refinery Closures: The Core of the Crisis

California's refining capacity is shrinking rapidly due to closures of major facilities:

Refinery	Owner	Capacity (bpd)	Status
Los Angeles (Wilmington)	Phillips 66	139,000-147,000	Closed Q4 2025
Benicia	Valero	145,000-150,000	Idling April 2026, may import to maintain supply
Rodeo	Phillips 66	120,000	Converted to renewable diesel (2024)
Martinez	PBF Energy	157,000	Partial operations (85-105k bpd) after Feb 2025 fire; full restart expected March 2026
Martinez	Marathon	161,000	Closed 2020

These closures will remove approximately 17% of California's refining capacity by mid-2026. The Phillips 66 Los Angeles refinery completed crude processing in mid-October 2025 and is fully shut down, while Valero's Benicia facility will continue producing gasoline through April 2026 before idling. Governor Newsom announced that Valero has committed to continuing to import gasoline into Northern California after idling, helping to maintain supply stability.

San Pablo Bay Pipeline Shutdown and Truck Transport

In a dramatic shift, the San Pablo Bay Pipeline (SPB-KLM)—the largest inland crude oil pipeline in California—has effectively shut down. This 373-mile pipeline carried crude from Kern County's San Joaquin Valley oil fields to Bay Area refineries but became financially unsustainable:

Volume collapse: When Valero's Benicia refinery canceled contracts in December 2025, throughput dropped to around 30,000 barrels per day—well below the 60,000 bpd needed for profitability
Financial losses: The pipeline was losing approximately $2 million per month
December 2025 nominations: Dropped to zero barrels
California regulators intervened in January 2026 to allow Crimson Utilities to raise interim transportation rates to $3.7527 per barrel, but the fundamental economics remain challenged

The consequence is stark: nearly 100 trucks per day now transport oil on Kern County roads that previously moved through the pipeline. Steve Layton, president of E&B Natural Resources, explained that at 15,000 barrels per day of trucked volume, this represents a massive shift to road transport. Trucking adds $5 to $10 per barrel in costs, which will flow through to consumers.

The irony is significant: this shift increases both emissions and highway congestion while adding transportation costs—contrary to California's environmental goals.

Companies and Refineries Involved

Refiners Exiting or Reducing Operations

Phillips 66: Closed Los Angeles refinery (2025) and converted Rodeo to renewable diesel (2024)
Valero Energy: Idling Benicia refinery (April 2026), but committing to import gasoline to maintain Northern California supply
PBF Energy: Operating Martinez at reduced capacity due to February 2025 fire damage; full restart expected March 2026

Companies Expanding to Fill the Gap

HF Sinclair: Evaluating a multi-phase pipeline expansion that could add up to 150,000 bpd of capacity from Rocky Mountain refineries to Nevada and California markets. Phase 1 targeting 35,000 bpd by 2028, expanding the Pioneer and UNEV pipelines
India, South Korea, and other importers: California gasoline imports from Asia hit a 20-year high in 2025, with India and South Korea as major suppliers

Remaining California Refineries

Chevron El Segundo (Los Angeles area)
Chevron Richmond (Bay Area)
Marathon Carson (Los Angeles area)
Torrance Refinery (operated by PBF Energy)

Price and Supply Impacts

Near-Term (2026)

Analysts provide a range of projections for California gasoline prices:

Source	Projected Price Impact
UC Davis economists	+$1.21/gallon by August 2026 when full closure impact realized
U.S. EIA	Small rise, partially offset by lower crude oil costs
USC Marshall School	High scenario: $7.35-$8.44/gallon (75% increase) by end of 2026

The UC Davis analysis projects a $0.40/gallon immediate increase after the first closure, rising to $1.21/gallon as markets reach new equilibrium around August 2026. The wide range in projections reflects uncertainty about how quickly imports can backfill lost production and whether additional refinery problems emerge.

Longer-Term Structural Changes

California is fundamentally restructuring its fuel supply chain:

Record imports: West Coast gasoline imports in 2025 averaged 118,580 bpd through October—already exceeding totals for any year since at least 2004
Import sources: India has become the largest supplier, sending 6.56 million barrels of finished gasoline over the last two years, followed by Canada (3.77 million bbl) and South Korea (3.47 million bbl)
Import growth: Seaborne imports of finished gasoline have more than doubled since 2023, with alkylate imports (a key CARBOB blending component) increasing fivefold since 2018

This represents a "new normal" for California—the state cannot easily receive gasoline from other U.S. regions because those refineries don't produce California-compliant fuel formulations.

Governor Newsom's Policy Response

1. E15 Gasoline Authorization (AB 30 - October 2025)

Governor Newsom signed AB 30, making California the last state to authorize E15 (15% ethanol) fuel sales. Key benefits:

Potential savings: Up to $0.20/gallon, saving Californians up to $2.7 billion annually according to UC Berkeley/Naval Academy research
Supply diversification: Reduces petroleum dependence by increasing ethanol content
Immediate effect: The law took effect immediately with an urgency clause
Air quality: UC Riverside research found E15 would not increase NOx emissions and would reduce particulate emissions

2. Kern County Drilling Expansion (SB 237 - September 2025)

This bill represents a significant reversal, allowing expanded oil production in California's oil heartland:

Permits: Up to 2,000 new drilling permits per year for Kern County, for the next decade
Context: In 2024, only 84 new well permits were approved statewide; 2025 saw only a handful
Effective date: Permit applications began January 2, 2026
Goal: Increase California's in-state crude supply toward 25% of refinery needs (currently under 20%)
Job creation potential: Chad Hathaway, a Kern County operator, estimates over 5,000 jobs were lost due to previous drilling restrictions

3. Minimum Fuel Inventory Requirements (ABX2-1 - October 2024)

Following severe price spikes in 2022-2023, Newsom called special legislative sessions resulting in:

CEC authority: The California Energy Commission can now require refineries to maintain minimum inventory levels of state-compliant fuels
Resupply plans: Refiners must demonstrate satisfactory resupply plans during maintenance periods
Price spike prevention: Research shows that when days of supply fall below 15 days, price spikes occur
Implementation delay: Consumer advocates have criticized the CEC for slow-walking the rulemaking despite the urgency

4. Summer Blend Considerations

California's reformulated gasoline (CaRFG) requires specific summer blend formulations with lower Reid Vapor Pressure (RVP)—as low as 7.0 psi—to reduce evaporative emissions during warm weather. The summer blend season in California runs from approximately April 1 through October 31, longer than most states.

While the EPA has granted nationwide emergency waivers for E15 summer sales since 2022, California's unique fuel specifications mean E15 can now be sold year-round in the state without a federal waiver since California's RVP requirements are already stricter than federal standards.

5. Cap-and-Invest Extension

As part of the September 2025 climate package, Newsom extended California's cap-and-trade program (rebranded as "cap-and-invest") through 2045, which will fund:

Up to $60 billion for utility bill relief
$20 billion for high-speed rail
$12 billion for public transit

Ensuring Adequate Supply Amid EV Uncertainty

The EV Adoption Landscape

California has sold over 2 million zero-emission vehicles and ZEVs represent about 23-25% of new vehicle sales. However:

Q1 2025 saw a slight decline year-over-year, driven by a 21.5% drop in Tesla registrations, though non-Tesla EV sales grew 14%
Market diversification: 147 EV models were available in Q1 2025, up from 105 the prior year
2035 mandate reassessment: California regulators are reviewing the 2035 gas-car sales ban due to affordability concerns, reduced federal incentives, and legal challenges

This creates genuine uncertainty: if EV adoption accelerates, gasoline demand will decline faster, making refinery investments less attractive. If adoption stalls, supply constraints will be more acute.

Strategies for Supply Security

Short-term measures (2026-2028)

Import infrastructure: Valero's commitment to continue importing gasoline after idling Benicia is critical for Northern California supply
Inventory requirements: CEC should expedite minimum inventory rules to prevent price spikes during refinery outages
E15 deployment: Rapid retail adoption of E15 can stretch gasoline supplies and reduce pump prices

Medium-term measures (2028-2030)

Pipeline expansion: HF Sinclair's proposed 150,000 bpd expansion from Rocky Mountain refineries could provide alternative supply routes by 2028
Kern County production: New drilling permits could meaningfully increase in-state crude supply over 3-5 years, though industry experts caution that ramping up takes time
Storage optimization: Maximize use of existing fuel storage infrastructure to build strategic reserves

Long-term considerations

Import terminal conversions: Valero's Benicia facility could potentially convert to an import terminal, maintaining supply infrastructure even without refining
Renewable fuels: Continue expanding renewable diesel and sustainable aviation fuel production (as Phillips 66 did at Rodeo)
Flexible transition planning: The California Energy Commission recommends a "holistic transportation fuels transition strategy" that balances clean energy goals with reliable fuel supply during the transition period

Conclusion

California faces a genuine energy transition challenge. The state is losing approximately 17-20% of its refining capacity while its largest crude pipeline has shut down, forcing a costly shift to truck transport and imported fuels. Price increases of $1 to potentially $3+ per gallon are possible by late 2026, depending on how effectively imports and remaining refineries can meet demand.

Governor Newsom's response—authorizing E15 fuel, expanding Kern County drilling permits, and creating regulatory tools for inventory management—represents a pragmatic attempt to balance the state's climate ambitions with the reality that millions of Californians still depend on gasoline. The uncertainty around EV adoption makes this balancing act particularly challenging: invest too heavily in petroleum infrastructure and risk stranded assets; underinvest and risk severe supply disruptions and price spikes during the transition.

The coming 18-24 months will be critical. If imports flow smoothly, HF Sinclair's pipeline expansions proceed, and Kern County production ramps up, California may navigate this transition with manageable price increases. If additional refinery problems emerge or import logistics falter, the state could face the severe price spikes that some analysts warn about.

References

OilEconomy

Don Bradford