On October 16, 2024, the refiner Phillips 66 announced that it will cease operations at its Los Angeles-area refinery in the fourth quarter of 2025. This announcement came a few days after California Governor Gavin Newsom signed a new law placing additional regulations on refineries.
The closure will affect approximately 600 employees and 300 contractors that currently work at the Los Angeles-area refinery. Politico reported that this closure would also impact 8% of the state’s already tight gasoline production.
Although Phillips 66 spokesperson Al Ortiz denied in an email to Politico that the closure was a response to Newsom’s signing the new law, California’s treatment of its oil industry has undoubtedly been a factor.
The news follows an announcement in August 2024 that Chevron, the second-largest U.S. oil company, will relocate from its California headquarters to Texas. The company, with roots in California dating back to 1879, will transition its headquarters to Houston over the next five years.
Chevron’s move comes as a response to California’s stringent regulations and aggressive climate policies. Chevron’s CEO, Mike Wirth, expressed concerns about the state’s business environment in an interview with The Wall Street Journal.
Wirth argued that California’s policies are detrimental to consumers, discourage investment, and ultimately harm the state’s economy. The relocation of such a prominent company highlights the growing tension between traditional energy firms and states pursuing ambitious climate goals.
California’s Environmental Regulations
Over the years, California has adopted the nation’s most stringent fuel standards. The state requires the production and sale of a unique blend of gasoline, known as California Reformulated Gasoline (CaRFG), which has stricter environmental standards than the federal blends used in most other states. This special formulation reduces emissions of pollutants like volatile organic compounds (VOCs) and sulfur, but it is more expensive to refine, adding to the overall cost of gasoline.
California’s gasoline also contains lower sulfur levels than the national average. Reducing sulfur is costly for refineries because it requires additional processing steps, leading to higher production costs that are passed on to consumers at the pump.
California’s Low Carbon Fuel Standard (LCFS) requires gasoline producers to reduce the carbon intensity of the fuels they sell. This can involve blending more expensive biofuels, investing in cleaner production technologies, or purchasing credits from other companies to meet the carbon intensity reduction targets. The added costs of complying with the LCFS are reflected in the price of gasoline.
Under California’s Cap-and-Trade program, refineries and other large greenhouse gas emitters must buy carbon credits to offset their emissions. These credits increase operational costs for refineries, which in turn raise the price of gasoline. Since this program is unique to California, it adds a cost that refineries in other states don’t have to bear.
Unintended Consequences
California energy producers must also comply with additional regulations, which are primarily designed to lower pollution. However, there are costs associated with these strict regulations, and there have been unintended consequences.
Because of its unique gasoline blend, the state cannot easily import gasoline from other regions in the event of supply disruptions. If a refinery goes offline due to maintenance or an accident, it is difficult to quickly source replacement fuel from outside the state because other regions don’t produce the same gasoline blends. This limited supply flexibility can cause price spikes when there are disruptions, leading to volatility in gasoline prices.
Those price spikes, in turn, can lead to higher profits for some refiners in the state. If one refinery goes offline for unplanned maintenance, the supply of fuel is suddenly reduced. That will either result in a price spike or outages. Therefore, some refiners may see profits surge as fuel prices spike.
Although these price spikes have been self-inflicted, California has tried to remedy the situation by suing oil companies and passing additional laws that have tried to prevent these price spikes. At the same time, California has vilified its oil industry for years. This creates a hostile environment for these companies.
California’s Future
Ultimately, California can pass whatever laws it wants with respect to its oil industry, but these companies can also respond. That’s what Chevron, and now Phillips 66, have done.
California’s aggressive environmental policies and stringent regulations on the oil industry have created a complex and challenging landscape for energy companies operating in the state. While these measures aim to reduce emissions and combat climate change, they have also led to unintended consequences such as higher fuel prices, supply vulnerabilities, and a strained relationship with the oil industry.
The recent decisions by major players like Chevron and Phillips 66 to relocate or cease operations in California highlight the delicate balance between environmental goals and economic realities. As the state continues to pursue its ambitious climate agenda, it may need to reassess its approach to ensure a stable energy supply and mitigate the economic impact on consumers.
The ongoing exodus of oil companies from California serves as a cautionary tale for other states considering similar regulatory paths, underscoring the need for a carefully calibrated approach that addresses both environmental concerns and economic stability.
These moves potentially further restrict California’s fuel supply, and will likely lead to even higher prices for California consumers.
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