For decades, gasoline in California has been more expensive than in other parts of the country, but there are predictions that already high prices at the pump may climb even higher in the next year or two.
One major refinery in the state is closing its doors by the end of this year, and last month another announced it will shut down in 2026. That’s led to concerns that fuel supplies across California will tighten, putting upward pressure on prices.
One study from a business professor at the University of Southern California went so far as to predict that gas prices in California could blow past $8 a gallon by the end of 2026 — although that figure has been disputed by some.
Closures coming
Last month, Valero, one of the country’s major transportation fuels producers, announced the company will shut down its refinery in the Bay Area city of Benicia next year.
“California has been pursuing policies to move away from fossil fuels for the past 20 years,” Valero CEO Lane Riggs said in a conference call with financial analysts, “and the consequence of that is the regulatory and enforcement environment is the most stringent and difficult of anywhere else in North America.”
The Valero announcement comes just months after another energy company — Phillips 66 — announced it will shut down its twin Southern California refinery facilities in Carson and Wilmington by the end of this year.
At the same time, the amount of gasoline that California drivers consume has been declining.
The big reasons include:
- the lingering effect of the work-from-home phenomenon that occurred during the COVID-19 outbreak has reduced fuel demand, since many employees are still not driving to and from work at the rate seen prior to the pandemic, and
- the growth of electric vehicles across the state that don’t run on gasoline.
So what’s that got to do with gas prices potentially rising?
Leigh Noda of Stillwater Associates, a transportation energy consulting company in Irvine, says the anticipated loss of gasoline supply expects to outpace the downward trend in lower gasoline consumption.
In addition to the pending closures at Valero and Phillips 66, two other petroleum refineries in California have switched to producing renewable diesel and sustainable aviation fuels since 2019.
“All four of these shutdowns are happening a lot faster to remove gasoline production capacity in California than the demand has decreased,” Noda said.
By themselves, the Valero and Phillips 66 facilities combine to account for almost 18% of the state’s crude oil capacity, according to the California Energy Commission.
So why don’t the other refineries in California increase their output to make up for the loss?
“The remaining refineries pretty much run to capacity already,” Noda said.
There are 13 refineries in California, but five of them are very small. Eight major refineries account for about 96% of crude oil capacity in the state — and that includes the Valero refinery in Benicia and the Phillips 66 facilities in Carson and Wilmington.
As of 2024, 63.5% of oil supply to California refineries came from foreign sources, according to the energy commission.
“We expect to see higher gasoline prices in the state and challenges in supplying gasoline” in the wake of the Valero announcement, Noda wrote in a paper he authored last month with one of his colleagues — but the report did not hazard a guess on how much prices at the pump would rise.
What passed in Sacramento
High gas prices have been a long-running complaint for Californians. The average price in the state for a gallon of regular on Friday came to $4.86, according to AAA. That’s $1.67 higher than the U.S. average.
Golden State drivers have also endured price spikes, including recent bouts in the late summer and early fall of 2022 and 2023 when the costs soared to more than $6 a gallon.
Accusing oil companies of “lying and gouging Californians to line their own pockets,” Gov. Gavin Newsom urged lawmakers in Sacramento to pass Senate Bill X1-2. Signed into law in 2023, the legislation created the Division of Petroleum Market Oversight to monitor California’s oil and gasoline companies.
Among its provisions, the legislation also gives the California Energy Commission authority to penalize oil companies if they exceed a “maximum gross refining margin.” The specifics of what will trigger the penalty — the first of its kind in the U.S. — and when it will be enforced are still being worked out.
Asked by the Union-Tribune about concerns of gas prices rising in the wake of the Valero and Phillips 66 closures, a spokesperson for Newsom said, “In the two years since the governor signed California’s gas price gouging law, the state has avoided severe gasoline price spikes like the historic 2022 spike, saving Californians billions of dollars at the pump.”
The spokesperson went to say in an email that “the state has more transparency from the industry than ever before.”
Last year, Newsom signed Assembly Bill X2-1, which requires California refineries to maintain minimum amounts of gasoline inventories in the hopes of preventing future price spikes. Failure to do so would result in civil penalties of at least $100,000 to a maximum of $1 million per day.
“Gov. Newsom will keep fighting to protect Californians from price spikes at the pump,” his spokesperson said.
Just days after the Valero announcement, Newsom sent a letter to energy commission vice chair Siva Gunda that directed him to “redouble the state’s efforts to work closely with refiners” to help ensure California has a safe, affordable and reliable supply of gasoline.
And in what certainly appeared to be a change in tone toward the oil industry, Newsom called on the commission to make sure “refiners continue to see the value in serving the California market, even as demand for fossil fuels continues its gradual decline over the coming decades.”
Newsom also directed Gunda to “reinforce the state’s openness to a collaborative relationship” with refiners.
$8 per gallon gas?
Earlier this month, University of Southern California management professor Michael Mische released a 13-page white paper that said refinery closures combined with state regulations, taxes and fees on fuels plus recent legislation could lead to gasoline prices in California increasing to between $6.045 a gallon by the end of this year to as much as $8.435 a gallon by the end of 2026.
“Even with the surviving refineries, there’s a supply problem (in California); there always has been,” said Mische, who works at USC’s Marshall School of Business. “That’s why we’ve had to import gasoline during tight times from Washington state, Japan and South Korea. Now that problem has been exacerbated.”
Newsom’s office has dismissed Mische’s findings as mere “guessing,” saying his report of relies on incorrect assumptions and question how the numbers were estimated. It also highlighted, along with Los Angeles-based advocacy group Consumer Watchdog, the work that Mische has done with the Kingdom of Saudi Arabia, the world’s second-largest oil-producing country.
Mische said his consulting work was related to Saudi Arabia’s efforts on sustainable energy that “had nothing to do with petroleum” and he stands by his report on California gasoline, calling the pushback “an attempt to suppress … personal opinion and academic work.”
The outlook for this summer
The Memorial Day weekend marks the start of the summer driving season when people gas up their cars and trucks to go on family vacations.
In the very short-term, Patrick De Haan, head of petroleum analysis at GasBuddy, predicts prices may even fall a little — provided there aren’t any unexpected outages at California refineries. De Haan said the average price in the San Diego area has remained steady for the past month, hovering at $4.77 a gallon.
“Prices could settle in the mid-fours” this summer, he said. “I’m hoping even in the low $4 per gallon range if everything goes well.”
As for the longer-term prospects for California gas prices, De Haan was not as optimistic.
“If I was a Moody’s,” he said, referring to the credit ratings and research firm, “I’d probably give it a negative outlook.”