California gasoline prices could reach more than $8 per gallon by the end of 2026, an increase of more than 75%, according to a new study led by Michael A. Mische of USC's Marshall School of Business. A key factor in this price increase is the potential loss of 21% of the state’s refining capacity from 2023 to April 2026 with the closure of the Phillips 66 refinery in Los Angeles and the Valero refinery in Benicia.
California in-state gasoline production may decline from 34.460 million gallons a day in 2023 to 27.242 million gallons a day by calendar year-end 2026. Based on current demand assumptions and estimates, this could create a gasoline deficit in the state of potentially 6.6 million gallons per day by the end of 2025 to 13.1 million gallons per day by the end of 2026. In addition to the two refinery closures, the new Low Carbon Fuel Standard (LCFS), an increase in excise taxes, cap and trade, and SBX1-2 and ABX2-1 could further contribute to an average consumer price increase to $8.435 a gallon by the end of 2026.
“Reductions in fuel supplies of this magnitude will resonate throughout multiple supply chains affecting production, costs, and prices across many industries such as air travel, food delivery, agricultural production, manufacturing, electrical power generation, distribution, groceries, and healthcare,” the report states.
“Additionally, a reduction in gasoline production and related price increases will likely have a dragging effect on the growth of California’s GDP, and have a significant impact on the affordability of living in the Golden State, as well as personal and household spending patterns and saving behaviors,” the report warns. “The loss of in-state gasoline production will also adversely affect corporate and personal income, sales, and excise tax revenues at a time when California’s budget deficit is estimated to be as high as $73 billion, and state and local government debt at $1.6 trillion.”
Other Potential Gasoline Sources
The report notes that Washington state has been California’s usual source to make up supply shortfalls, but Washington’s current capacity of 648,000 barrels a day is less than 40% of California’s capacity. The state “does not appear that it has sufficient surplus capacity to compensate for the expected reductions in California's in-state gasoline production and shortfall in daily supplies.” This means that California will most likely have to import gasoline from refineries on the U.S. Gulf Coast as well as in South Korea and China. “As a consequence of the two refinery closings, California will be at the mercy of out of state and foreign, non-U.S. refiners,” the report states.
Notably, gasoline needed to make up the deficit must be California compliant and meet the current Low Carbon Fuel Standard (LCFS) and potentially a new LCFS formula.
Dependance on Imports Via Tankers
California’s lack of inbound pipelines will also make it dependent on marine vessels to transport the required gasoline to meet daily demand. “Port congestion, maritime lanes prioritization, maritime GHG emissions, additional transit days, and Panama Canal tolls will build on transportation costs, which invariably will be reflected in higher gasoline prices that the public pays at the pump,” the report states.
“The logistical complexities of coordinating significant amounts of inbound gasoline from multiple sources via maritime vessels will be exponentially compounded by scheduling, seasonality, weather, the geopolitical landscape, the availability of vessels, most of which are foreign-flagged, and the compliance with the U.S. Jones Act.” The report notes that, as of December 2024, there were only 55 maritime vessels that are compliant with the Jones Act. This places further constraints on imports from Washington and the Gulf Coast.
Dependency on Foreign Sources
With greater dependency on foreign sources, the report notes, California’s vulnerability to disruptions, spot markets, and geopolitical events increases substantially. “Any disruptions to oil and foreign gasoline supplies will exacerbate California’s gasoline dilemma and drive-up prices,” the reported noted. “Any disruptions to maritime markets, routes, ports, operations, etc., will have a significant effect on California gasoline security and consumer prices, as well as prices in Nevada and Arizona.”
Implications
The report states that California's average gasoline prices have always been higher than the U.S. average, with a price differential of around 13% since 1984. It notes that that the price disparity began to widen and accelerate in January 2015 after the imposition of the Phase 2 cap and trade regulations under AB 23.
“Despite the litany of high-profile legislative actions targeting refiners with the intent to lower gasoline prices in the state, including banning of the sale of new gasoline powered vehicles in 2035, the price of retail gasoline in California has increased faster than the overall U.S. and, in some instances, moved higher when overall prices in the U.S. declined,” it states.
The report notes that California's average retail gasoline prices are now 40% to 50% higher than the national average. “California mandated regulatory fees, costs, and taxes are the highest in the U.S. and add $1.47 to a gallon of gasoline,” the report states. “Even without the loss of two of its most important refineries, California regulatory actions could potentially increase the price at the pump by $1.182 a gallon.”
The report notes that a production increase in the remaining California refineries would not completely compensate for the loss of two refineries. “California’s consumption of gasoline, which has declined by 11% since 2001, is not expected to suddenly drop by 20% in the next twelve months to achieve equilibrium with the shortfall of in-state gasoline production.” California gasoline consumption fell by only about 1% annually from 2021 to 2024.
Self-Created Gasoline Insecurity
The report found that California’s high gasoline prices and potential shortages “are largely self-created.” Over the last 30 to 50 years, the population has increased by 24% and the number of motor vehicles has grown by 38%, while the number of refineries has declined by 56%, in-state daily refinery capacity has decreased by 36%, finished gasoline stocks have fallen by 98%. Overall, average gasoline prices for all formulations have increased by 253%, the report notes. “Concurrently, a series of regulatory costs that have been layered onto refiners, distributors, and local operators have had a compounding effect on retail prices at the pump.”
Additionally, in-state oil production has fallen by 63% and imports of foreign oil increased 712%. In 1982, in-state oil production met 62% of California’s oil demand. From 1982 to 2023, in-state oil production fell by 69% from a high of 398,280 barrels a day in 1985 to 123,947 barrels a day in 2023. Now, California produces only around 2.5% to 2.7% of all U.S. crude and is producing only 23.7% of its own in-state needs. Since 1990, California’s imports of foreign oil have increased by 713%. The state now imports over 60% of its petroleum needs from non-U.S. foreign sources, including Iraq, Saudi Arabia, Brazil, and Guyana. “While California was becoming more dependent on foreign sources, the overall U.S. became less dependent,” the report states.
No Evidence of Price Gouging
The study found “no direct economic evidence of widespread price gouging or price or supply manipulation” by California refiners. High gasoline prices can be “directly traced to declining in-state production of both oil and decreasing gasoline supplies, increasing regulatory oversight, escalating regulatory costs, and fees associated with mandatory programs such as Cap and Trade, environmental initiatives, the California special gasoline blend (LCFS), and various taxes, which collectively, adds around $1.47 a gallon to the current consumer price.”
Operating Environment
The report concludes that the issue of refinery operations in California is not only about profits but is the state’s operating environment. The report outlines 10 legislative and regulatory actions that could be considered:
Approach Phillips 66 and Valero with a compelling business proposition to remain in California.
Immediate revocation of Executive Order N79-20, banning the sale of new gasoline powered (internal combustion engines) vehicles in California by 2035, with a rollback of the ban to 2055. “The imposition of this mandate is tantamount to a death sentence on California oil producers, refiners, the 10,957 gas stations (most of which are independently small business owned and operated), some 124,000 station employees, and consumers,” the report states.
Immediate suspension of CARB’s new LCFS that was introduced in late 2024, and a five-year adaptation of the 2024 CARB standard to help refiners stabilize production costs.
Immediate elimination of the artificial profit margin cap imposed on refiners by SBX1-2 and the California Energy Commission’s Division of Petroleum Market Oversight (DPMO).
Immediate rollback of the California State Excise Tax on gasoline to the national average of around $.33 a gallon.
A temporary suspension on ABX2-1 requiring refiners to produce, store, and finance surplus gasoline inventories.
A capitation of $0.65 a gallon on the cap and trade and other environmental fees and costs to refiners.
Readdress and relieve the restrictions on in-state petroleum production and encourage in-state producers to increase California oil field production.
Create Enhanced Production Zones by reducing regulatory restrictions on current in-state oil production operators, with particular emphasis on increasing California field production in Kern and Santa Barbara counties.
Require California producers operating in the state to “sell first” to in-state refiners as a condition for ITC qualification.
Provide for a refinery specific 15% “investment tax credit” (ITC) for every dollar of capital invested in additional oil and gasoline production, storage, and pipelines.
Suspend, delay or nullify any enactment of AB-1866, AB- 2716, and AB-1448 eliminating the use of older and least utilized wells or the rehabilitation of older and underutilized wells and SB-1122 on restrictions.
Federal Response
The report also notes that the “people and businesses of California, may have to look to the Federal Government for price relief and gasoline security.” This could include a Presidential Declaration or order specifying California refineries as national security assets or the designation of California refineries as essential assets for the Department of Defense.