Refinery Closures Increase California’s Reliance on Fuel Imports

Over the past seven months, California has lost about 17% of its refining capacity with the closure of two refineries: the Phillips 66 refinery in Los Angeles and the Valero refinery near San Francisco. Their combined loss has resulted in California’s refined product imports reaching almost 345,000 barrels per day through April 10 of this year, up 38% year over year, Argus reports. According to AAA, the average gasoline price in California as of May 7 was $6.17 per gallon, $1.61 more than the national average of $4.56. With these two refinery closures, California now has 11 refineries, down from 42 refineries 40 years ago. The Western Gateway refined products pipeline could help lower imports once it comes online in 2029. The developers, Phillips 66 and Kinder Morgan, expect to make a final investment decision on it by mid- to late summer.

While imports are increasing the cost of gasoline in California, most of the difference between U.S. average national gas prices and California’s average price is due to policies and regulations that lawmakers in the state have instituted, many in the name of climate change. They include the highest state gas tax in the nation at $0.709 per gallon and hidden fees that result from a cap-and-trade program to lower greenhouse gas emissions, a low-carbon fuel program, underground gas storage fees, and a state and local sales tax, which all add to the price of gasoline. While fuel tax revenues are supposed to be used for road repair, California wants to divert some of those revenues to subsidize “green” jet fuel production. California’s roads rank 49th out of the 50 states, with only Alaska’s roads ranking worse. Governor Newsom has proposed a $1 to $2 credit for every gallon of alternative jet fuel, sustainable aviation fuel (SAF), “produced for use in California,” that would come from the road repair budget.

But the higher self-imposed prices and road disrepair are not the only problems facing Californians, as a team of researchers at the University of Southern California and the University of California, Berkeley warns that the state could soon face energy crisis conditions created by its policies and the supply issues associated with the conflict in Iran. The Iran conflict is exacerbating issues with the state’s refinery closures and decline in oil production as the state now must rely on imports of gasoline, which it mostly receives from Asian refiners. Asia provides nearly all of California’s gasoline imports — roughly 20% of the overall gasoline supply for the state. Asian refiners are oil supply-constrained by the effective closure of the Strait of Hormuz and have been forced to curtail exports of refined products since the beginning of March. Because it takes roughly 25 to 45 days for tankers to make the trip across the Pacific Ocean, the impacts would probably not begin to be felt by Californians until the end of April.

California is searching for other alternatives, but the state’s specific requirements for gasoline, classified as a “boutique” fuel, are not widely produced. California has even purchased gasoline from U.S. Gulf Coast refineries via the Bahamas. The east to the Bahamas, then west to California route was used so that California could comply with the Jones Act, which requires U.S. commodities to be moved between U.S. ports by U.S.-flagged ships crewed by U.S. personnel. Using U.S.-flagged ships would have increased shipping costs because there are just 55 Jones Act-compliant oil tankers worldwide, compared with more than 7,000 oil tankers globally. Due to the conflict in Iran, President Trump waived the Jones Act first for 30 days and then for an additional 90 days.

The Western Gateway Pipeline

Phillips 66 and Kinder Morgan have proposed a 1,300-mile pipeline that will carry petroleum products from Illinois to California and adjacent markets. Its planned design would combine new and existing infrastructure. The Western Gateway Pipeline’s completion date by 2029 is dependent on the receipt of permits and regulatory approvals. Once complete, it would be the world’s largest fuel conduit. The pipeline network would cross from Illinois through Oklahoma, Texas, New Mexico, Arizona, and Nevada to California and adjacent markets, with connectivity to Las Vegas, Nevada. Much of the pipeline would be built along or use existing Kinder Morgan conduits, with a new section across New Mexico. The section of the pipeline that would cross near Mescalero Apache land in New Mexico has received buy-in from local tribes, but past pipeline projects have often been caught up in lawsuits and protests.

Analysis

Like Europe, California is facing an energy crisis due to its anti-oil-and-gas policies, which are resulting in refinery closures, declining state oil production, and overreliance on imports, particularly for gasoline, a boutique fuel with specific requirements. The closure of the Strait of Hormuz has exacerbated the issues California faced before the war. As IER President Tom Pyle explains, “The Iran-related shock simply magnified a pattern that was already in place: red states and the interior Midwest enjoyed noticeably lower prices, thanks to geography, proximity to production, and lighter regulatory burdens. Blue-state policies, especially California’s, exported higher costs across borders.”

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