Valero’s Refinery Closure Threatens California’s Energy Security—and Investor Portfolios

California’s energy landscape is at a crossroads. Valero Energy (VLO) has signaled its intent to idle or shut down its Benicia refinery by April 2026, a move that could reduce the state’s refining capacity by nearly 9% overnight. Combined with Phillips 66’s (PSX) planned refinery closures in Southern California, total refining capacity could drop by 21.77% by 2026—a loss of 389,000 barrels per day. This has investors and policymakers scrambling to assess the implications for energy prices, supply reliability, and the broader energy transition.

The Benicia refinery, a critical node in California’s fuel supply chain, processes 145,000 barrels of oil daily, supplying gasoline to the San Francisco Bay Area and aviation fuel to major airports. Its closure would eliminate 2.92 million gallons of daily gasoline production. Meanwhile, Valero’s Wilmington refinery, which handles 85,000 barrels per day, faces an uncertain future as well.

The immediate catalyst for Valero’s decision is a $1.1 billion pre-tax impairment charge taken in Q1 2025, reflecting the company’s view that its California assets are no longer economically viable. The write-down includes $337 million in expected costs to retire the facilities. Valero cited regulatory overreach, high operating costs, and the state’s aggressive climate policies as key drivers.

The Regulatory Gauntlet
California’s environmental policies have created a perfect storm for refiners. The 2035 ban on new gasoline-powered vehicles, penalties under Senate Bill X1-2 for exceeding refining margins, and fines for emissions violations (including an $85 million penalty for Valero) have eroded profitability.

The state’s fuel standards, which mandate cleaner-burning gasoline, add further costs. While these policies align with California’s climate goals, they have pushed refiners to the brink. Chevron (CVX), for instance, announced plans to relocate its headquarters to Houston in 2024 and exit California entirely by 2030—a move that underscores the sector’s exodus.

The Supply Crunch and Price Spike Risk
California already imports 63.5% of its crude oil from foreign sources, and further refinery closures will heighten reliance on Gulf Coast refineries and international imports. This logistical shift could increase maritime transport costs and supply volatility.

Gasoline prices in California already average $4.89 per gallon—nearly double the national average of $3.17—and analysts warn of further spikes. Patrick De Haan of GasBuddy estimates that reduced refining capacity could push prices higher, especially during peak demand periods.

The California Energy Commission (CEC) acknowledges the risks, stating it will monitor fuel markets and collaborate with industry stakeholders. But Governor Newsom’s administration faces criticism for regulatory overreach. Critics argue that penalties and policies are driving companies out faster than the state’s renewable energy infrastructure can compensate.

The Tension Between Climate Goals and Energy Security
California aims to phase out fossil fuels by 2035, but only 25% of car sales in 2025 were zero-emission vehicles. This lag highlights the difficulty of rapid transitions. While renewables expand, the state’s energy security hinges on maintaining its existing fossil fuel infrastructure—a paradox that could worsen price volatility and job losses.

The closure of Benicia alone would cost 400 jobs, and the broader sector faces further layoffs. The CEC’s 2023 report warns that California’s refining capacity is already insufficient to meet demand during disruptions, such as storms or pipeline outages.

Investment Implications
For investors, Valero’s decision raises red flags about the viability of oil majors in states with aggressive climate policies. Valero’s stock has underperformed the S&P 500 by over 20% year-to-date, reflecting market skepticism about its California operations.

Meanwhile, investors in utilities or renewable energy firms may see opportunities if the state accelerates its transition to renewables. However, the immediate risk is higher gasoline prices, which could hurt consumer spending and exacerbate inflation.

Conclusion
Valero’s refinery closure is a watershed moment for California’s energy future. With refining capacity set to plummet by nearly a quarter, the state faces a stark trade-off: Either relax regulations to preserve existing infrastructure or accept higher prices, greater reliance on foreign oil, and supply instability.

The data is clear: California’s gasoline prices are already 54% above the national average, and further closures could push them higher. For investors, this signals heightened risks for energy companies operating under stringent regulations—and an urgent need for policymakers to balance climate goals with energy resilience.

In the end, Valero’s decision isn’t just about one refinery—it’s a warning shot about the costs of rapid decarbonization in the absence of a coherent energy strategy.