A hundred years ago, California produced a quarter of the world’s oil supply. Today, it is the industry’s would-be undertaker, announcing a ban on sales of gasoline-powered vehicles from 2035. Yet with its famously long commutes, California is also second only to Texas in the US when it comes to guzzling gas. Reconciling today’s dependence with tomorrow’s ambitions poses a big problem for the state’s refineries but also the state itself.
When it comes to oil, California is like Ireland: An island divided north and south, albeit sunnier. Mountains fence it off to the east; with no significant pipelines crossing the Rockies, California imports more oil from Iraq than the US Gulf Coast. The state is also disconnected within, with two largely separate oil markets centered on the Bay Area and Los Angeles, respectively. Northern refineries tend to produce more diesel; southern ones more jet fuel. But both produce a lot of gasoline. Not just any gasoline, but the smog-reducing grade that the state requires.
Having peaked at more than a million barrels a day in 2004, California’s gasoline demand has since dropped by about a quarter.
Similarly, since that peak, more than a third of California’s refineries have gone dark. Naturally, those were the smaller ones; capacity has dropped by only 13%.
Big demand twinned with relative isolation — read: less competition — would seemingly make California a refiner’s dream. When the Torrance plant blew up in 2015, margins jumped for the state’s remaining refineries. But the math changes when that fuel market also happens to be determined to stamp out consumption. Even before California was considering the ban on gasoline vehicles, higher pump prices have been curbing demand for years, in part because of isolation but also because of local taxes and environmental levies (as well as a somewhat mysterious premium identified by UC Berkeley’s Severin Borenstein).
The ban accelerates things, and then some. The Advanced Clean Cars II rule just approved by the California Air Resources Board, or CARB, targets zero-emission vehicles, or ZEVs — mostly pure electric — accounting for 35% of new vehicles sales in 2026, 68% in 2030 and 100% in 2035. That path is a bit more ambitious than the modeling for CARB’s plan to reduce greenhouse gas emissions released in May, but that already envisaged a big drop in gasoline demand.
Three things about that chart. First, although ZEVs make up 100% of new vehicle sales by 2035, the fleet overall is still 60% gasoline-fueled. Second, gasoline demand falls more rapidly than the fleet of vehicles using it because demand was modeled to decline by 40% even without the new mandate. Third, even assuming that 64% drop in gasoline consumption by 2035, this would imply demand still being about 300,000 barrels a day.
For local refiners, this is what evisceration looks like. Assuming gasoline at half the yield on a barrel of oil, and excluding exports, that level of demand implies utilization of current capacity at just 33%. Even during the pandemic lockdowns, utilization of West Coast refineries dipped to only 63%. That was enough to force the shutdown of almost a tenth of Californian capacity.
Refiners can shift their output yields, but not by much. Matt Kimmel, a senior analyst at Wood Mackenzie, an energy consultancy, points out that price signals today encourage exactly that: “You have all the reason in the world to produce more jet [fuel] and diesel, but it’s still 50% gasoline,” referring to current output. Kimmel cites other limitations on flexibility. California refineries lack the petrochemical capabilities of their counterparts in Texas. State-level carbon pricing also make it less economical to export displaced gasoline elsewhere, especially because California refineries already ship in more than half their crude oil from overseas.
The likeliest consequence would be shutdowns or conversion of some capacity to produce renewable diesel or sustainable aviation fuel. Existing state programs encourage the latter, and subsidies in the Inflation Reduction Act offer further incentive. However, electrification will compete with renewable diesel for the heavy trucking market. Aviation is more promising, but jet fuel is less than a fifth of current refinery output on the West Coast, so it can’t replace activity entirely. In addition, only more sophisticated refineries could incorporate low-carbon-fuel production without a significant loss of overall capacity.
As big of a challenge as this presents to California’s refiners, it’s also a challenge for the state itself.
No refinery would operate at 33% utilization; fixed costs mean it would shut down long before then. For those still driving gasoline-powered vehicles — still half the fleet in 2037, by CARB’s May figures — that portends a volatile future. Reliance on imported gasoline would be expensive, not least because, as CARB wrote in May, investment in port and fuel-handling facilities, as well as logistics, would be required to deal with all the extra tanker traffic. This disruption would extend into other areas because a closed plant doesn’t produce jet fuel or diesel either. There is also a question of who would even invest in things like new storage tanks at ports or, more exotically, carbon capture at refineries. When the demand line points down, big upfront costs get spread across ever decreasing gallons of supply. That equation rarely pencils out.
The big risk is disruption. That has already been illustrated with California’s electricity grid. As renewable energy shrinks the scope for profitable generation at conventional plants, some eventually just switch off rather than run less. Yet until California has, say, built enough battery capacity to replace gas-fired peaker plants, it risks blackouts when solar power diminishes in the evening and demand is high — as the current heat wave demonstrates. The heat wave is also a timely warning that California’s ban on gasoline vehicle sales will be entirely moot unless it strengthens its grid relatively quickly and, crucially, figures out ways to spread vehicle charging throughout the day to prevent excessive demand (see this).
Like the refiners, Sacramento faces some constraints on its own flexibility, but it has shifted tack at crucial moments. Last Wednesday evening’s grid emergency came — helpfully? — hours before an overwhelming vote in the state legislature to keep California’s last nuclear plant open. The state has subsidized older gas-fired plants to remain on standby and even offered to subsidize inefficient backyard generators to the tune of $2,000 per megawatt-hour. Such measures, it must be said, aren’t too dissimilar from payments made in other countries to oil refineries just to stay open.
Yet it must also be said that California’s heat wave, just the latest example of extreme weather to strike the state, serves as a reminder that the increasing costs of climate change demand decarbonization, and quickly. That same speed, however, ensures disruption of its own, as economics slip away from old energy systems faster than our physical reliance on them.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.
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