California's Refinery Dilemma: State Ownership on the Table

The California Energy Commission (CEC) is exploring a controversial option to ensure a reliable supply of affordable and safe transportation fuels in the state: state ownership of one or more oil refineries. As demand for gasoline declines and refineries close, California faces a challenging future in maintaining steady gas supplies and preventing price spikes.

The state's gasoline consumption peaked in 2005 and has since fallen by 15% through 2023, with electric vehicles (EVs) accounting for about 25% of annual new car sales. By 2035, new sales of gasoline cars and light trucks will be banned, further reducing demand. This decline in demand, coupled with strategic shifts among major oil refiners, has led to concerns about the state's ability to maintain a stable gasoline supply.

Two California refineries have already ceased producing gasoline, and the Phillips 66 refinery complex in Wilmington plans to close down permanently by the end of 2025. This leaves eight major refineries capable of producing gasoline, but both Chevron and Valero are contemplating permanent refinery closures. The closure of any one refinery would create serious gasoline supply issues, according to industry analysts.

The CEC is considering state ownership of refineries as one of several options to address this challenge. However, the idea of state involvement in refinery ownership or management is not without its critics. The Western States Petroleum Assn. (WSPA) warns that state involvement would be difficult due to the complexity and high costs of running a refinery. The energy commission acknowledges that there are many challenges to overcome with a state-owned refinery, including the high cost to purchase and operate, the skilled labor and expertise necessary to manage refinery operations, and how the refinery would fit into the state's transition away from petroleum fuels.

Gov. Gavin Newsom's office referred questions to the state energy commission but issued a statement saying California is "engaged in meaningful and thoughtful policy work to successfully manage our transition away from fossil fuels over the next 20 years, not overnight." The energy commission acknowledged that "there are many challenges to overcome" with a state-owned refinery.

California is known as a "gasoline island" due to its lack of a multistate logistics network, making it difficult to alleviate supply shocks. No pipelines exist to feed gasoline in from other states, and ocean shipments from the refinery-rich Gulf States are restricted by the Jones Act. Gasoline imports account for only 8% of California's supply, with the remaining 92% produced at California refineries. The special blends of gasoline required in California also drive up gasoline prices and raise the risk of shortages, as little such gasoline is produced outside the state.

In conclusion, California's consideration of state-owned refineries highlights the challenges the state faces in maintaining a stable gasoline supply as demand declines and refineries close. While state ownership is one option being considered, it is not without its critics and challenges. The CEC is engaged in meaningful and thoughtful policy work to manage the transition away from fossil fuels, and a state-owned refinery is just one of many options being considered as part of a broader, long-term strategy to address the specific challenges of managing the transition away from fossil fuels, including the potential for state ownership of refineries.