Energy Infrastructure Risk in California: Refining Industry Exposure and Supply Chain Vulnerabilities Amid Pipeline Shutdowns

The impending shutdown of California's largest inland oil pipeline, the San Pablo Bay Pipeline, has ignited a crisis for the state's refining sector, exposing vulnerabilities in energy infrastructure and regional supply chains. Operated by Crimson Midstream LLC, the pipeline is hemorrhaging $2 million monthly and requires a 37% rate increase and a temporary $3.75-per-barrel tariff hike to remain operationalCalifornia's Biggest Inland Oil Pipe On Course to Shut...^[1]. Without these measures, the pipeline's closure would force Bay Area refiners like Valero Energy Corp.'s Benicia refinery and PBF Energy Inc.'s Martinez plant—collectively accounting for 20% of California's fuel production—to pivot to costlier ocean-borne crude and highway transportCalifornia's Biggest Inland Oil Pipe On Course to Shut...^[1]. This shift could displace 15,000 barrels of daily crude shipments, exacerbating logistical strain and environmental risksCalifornia's Biggest Inland Oil Pipe On Course to Shut...^[1].

Financial and Operational Challenges

The pipeline's financial distress mirrors broader declines in California's inland crude production, which has plummeted by over 70% in four decadesCalifornia's Biggest Inland Oil Pipe On Course to Shut...^[1]. State policies favoring offshore drilling restrictions and inland permitting reforms have further weakened the pipeline's viabilityCalifornia's Biggest Inland Oil Pipe On Course to Shut...^[1]. For refiners, the pipeline's potential closure compounds existing challenges. Valero, for instance, announced in April 2025 the shutdown of its 170,000-barrel-per-day San Francisco-area refinery by year-end, a move attributed to “evolving market conditions” and California's stringent regulatory environmentCalifornia refineries, imported crude oil and refined fuels^[3]. This follows the closure of the Phillips 66 Los Angeles refinery, which has already reduced the state's refining capacity by 300,000 barrels per dayCalifornia refineries, imported crude oil and refined fuels^[3].

Supply Chain Implications

The loss of inland pipeline infrastructure has forced California to rely increasingly on imported crude and refined fuels. According to a report by Lodi Eye, the state's refineries are uniquely specialized, unable to source inputs from most domestic producers, leaving them exposed to global market fluctuationsCalifornia refineries, imported crude oil and refined fuels^[3]. This dependency raises concerns about energy security and price volatility. Analysts project that by 2026, California's in-state gasoline production could drop from 34.460 million gallons per day in 2023 to 27.242 million gallons per day, creating a potential shortfall of 13.1 million gallons per dayCalifornia Facing $8.43/gallon Gas – a 75% Increase – as ...^[4]. Such a gap could drive gas prices to $8.43 per gallon—a 75% increase from current levels of $4.624—according to the California GlobeCalifornia Facing $8.43/gallon Gas – a 75% Increase – as ...^[4].

Broader Energy Challenges

California's energy landscape is further strained by political and legal battles. A recent lawsuit opposing the restart of aging offshore oil platforms in the Santa Barbara Channel underscores the tension between energy needs and environmental protectionsCalifornia Facing $8.43/gallon Gas – a 75% Increase – as ...^[4]. Meanwhile, the California Energy Commission has scrambled to prepare for increased reliance on imported gasoline, though state infrastructure may lack the capacity to handle this transition without price volatilityCalifornia refineries, imported crude oil and refined fuels^[3]. In response, regulators delayed a refinery profit cap by five years to ease financial pressures on refinersCalifornia regulators delay refinery profit cap for five years^[2]. However, industry analysts argue that California's regulatory environment remains a key driver of refinery closuresCalifornia refineries, imported crude oil and refined fuels^[3].

Investment Risk Assessment

For investors, the confluence of pipeline shutdowns, refinery closures, and regulatory uncertainty presents significant risks. The San Pablo Bay Pipeline's potential closure would not only disrupt supply chains but also amplify exposure to global geopolitical risks and price shocks. Refiners like Valero and PBF Energy face operational constraints, with limited options to offset rising costs. While Crimson Midstream's proposed rate hikes aim to stabilize the pipeline, these measures may not address the underlying decline in inland production or the state's reliance on imports.

Conclusion

California's energy infrastructure is at a crossroads. The San Pablo Bay Pipeline's financial instability and the cascading closure of refineries highlight a systemic vulnerability in the state's supply chains. For investors, the risks are clear: heightened price volatility, energy insecurity, and regulatory unpredictability. While mitigation strategies such as rate hikes and temporary tariffs offer short-term relief, they fail to address the long-term structural challenges facing the refining industry. As California grapples with these issues, stakeholders must weigh the costs of inaction against the potential for further disruption in a market already teetering on the edge.