Is California government considering oil refinery takeovers? Yes, it is

Russia. China. Venezuela. Iran. More than a dozen countries make gasoline at state-owned refineries.

Could California be next on the list?

California policymakers are considering state ownership of one or more oil refineries, one item on a list of options presented by the California Energy Commission to ensure steady gas supplies as oil companies pull back from the refinery business in the state.

“The state recognizes that they’re on a pathway to more refinery closures,” said Skip York, chief energy strategist at energy consultant Turner Mason & Co. The risk to consumers and the state’s economy, he said, is gasoline supply disappearing faster than consumer demand, resulting in fuel shortages, higher prices and severe logistical challenges.

Gasoline demand is falling in California, albeit slowly, for two reasons: more efficient gasoline engines, and the increasing number of electric vehicles on the road. Gasoline consumption in California peaked in 2005 and fell 15% through 2023, according to the Union of Concerned Scientists.

Electric vehicles, including plug-in hybrids, now represent about 25% of annual new car sales. By state mandate, new sales of gasoline cars and light trucks will be banned starting in model year 2035.

The drop in demand is causing fundamental strategic shifts among the state’s major oil refiners: Chevron, Marathon, Phillips 66, PBF Energy and Valero.

Already, two California refineries have ceased producing gasoline to make biodiesel fuel for use in heavy-duty trucks, a cleaner-fuel alternative that enjoys rich state subsidies. More worrisome, the Phillips 66 refinery complex in Wilmington, just outside Los Angeles, plans to close down permanently by year’s end.

That leaves eight major refineries in California capable of producing gasoline. The closure of any one would create serious gasoline supply issues, industry analysts say. But both Chevron and Valero are contemplating permanent refinery closures.

The implications? “Demand will decline gradually,” York said, “but supply will fall out in chunks.” What’s unknown is how many refineries will close, and how soon, and how that will affect supply and demand.

That puts the state in a tough position, according to York. “Even if you had perfect foresight, it would be hard to get the timing right.”

A state refinery takeover seems like a radical idea, but the fact that it’s being considered demonstrates the seriousness of the supply issue.

It’s one of several options laid out by the California Energy Commission, which is fulfilling a legislative order to find ways to ensure “a reliable supply of affordable and safe transportation fuels in California.”

The options list is disparate: Ship in more gasoline from Asia; regulate refineries on the order of electric utilities; cap profit margins; and many more.

The list was due to be transformed into a formal transition plan by Dec. 31, 2024, but six weeks later no plan has been issued. Therefore, it’s not yet clear what the state response will be if another refinery announces a shutdown this year or next.

California is known as a “gasoline island” lacking the kind of multistate logistics network through most of the continental U.S. that can help alleviate supply shocks. No pipelines exist to feed gasoline in from other states. Ocean shipments from the refinery-rich gulf states are restricted by an antiquated federal law known as the Jones Act. Gasoline imports add up to only 8% of California supply. The other 92% is nearly all produced at California refineries.

Further complicating matters: the special blends of gasoline required in California. Those required formulations have gone a long way toward reducing air pollution. But they also drive up gasoline prices and raise the risk of shortages, because little such gasoline is produced outside California.

The Western States Petroleum Assn. lobby group warns that state involvement in refinery ownership or management would be difficult.

“This is a very complex and hard business to run,” the group said in a statement. “There are commercial barriers and technical barriers that take a comprehensive and holistic understanding of the industry, and how it works.”

Asked about the potential for state-owned refineries, 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.”

In a statement, the energy commission acknowledged 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.”

James Gallagher, the Assembly Republican leader from Yuba City, says California isn’t moving quickly enough to address potential gasoline shortages.

“We’re starting to lose refineries because we’ve made it so expensive and impossible to operate in California,” he said. “Now, after we’ve chased them off, we’re talking about taking them over to ensure there’s some supply. We’re moving toward price controls and government takeover of industries. That’s never worked very well in the history of the world.”

State Senate Minority Leader Brian Jones (R-Santee) agreed: “The state has no business being in the oil refinery business,” he said.

Their Democratic counterparts, Assembly Speaker Robert Rivas (D-Hollister) and Senate President Pro Tem Mike McGuire (D-Sonoma), declined to be interviewed.

Talk of further refinery closures over the next couple of years is heating up. In a conference call with investors last year, shortly after the Phillips 66 announcement, Valero Chief Executive Lane Riggs responded to concerns about the company closing either of its two California refineries.

“All options are on the table,” he said. “Clearly, the California regulatory environment is putting pressure on operators out there and how they might think about going forward with their operations.”

Chevron, a California company since 1879, last year announced that it was moving its headquarters to Texas. The company has considered ceasing production at one or both of its California refineries, the Wall Street Journal recently reported, which Chevron confirmed in a statement to The Times.

“Recent California policies, like banning the sale of new internal combustion engine vehicles by 2035, the potential tax/penalty on refinery profits and the potential new minimum storage requirement are all headwinds to our business and erode our confidence going forward,” Andy Walz, Chevron’s president of downstream, midstream and chemicals, said in the statement.

Jones said while he’s not sure the state-owned refinery option is a serious proposal, it’s on the options list, and the looming supply issue is real. “I’m not sure all Californians have grasped the impending urgency of the situation,” he said.

“I think what we probably need is to build another refinery here in the state,” Jones said. Otherwise, when refineries close, gasoline demand would have to be met by gasoline imports, mostly by ship, from Asia.

“People freak out about the environmental impacts of crude oil shipments,” Jones said. “But no one’s freaking out about the environmental impacts of gasoline imports.”