On October 16, 2024, refiner Phillips 66 announced that it would cease operations at its Los Angeles area refinery in the fourth quarter of 2025. The announcement comes days after California Governor Gavin Newsom signed a new law imposing additional regulations on refineries. .

The closure will affect approximately 600 employees and 300 contractors currently working at the Los Angeles-area refinery. Policy said the shutdown would also impact 8% of the state’s already limited gasoline production.

Although Phillips 66 spokesperson Al Ortiz denied this in an email to Policy If the shutdown was a response to Newsom signing the new law, California’s treatment of its oil industry was undoubtedly a factor.

This news follows the August 2024 announcement that Chevron, the second largest U.S. oil company, would move from its California headquarters to Texas. The company, whose roots date back to 1879 in California, will move its headquarters to Houston over the next five years.

Chevron’s decision is a response to California’s strict regulations and aggressive climate policies. Chevron 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 harmful to consumers, discourage investment and ultimately harm the state’s economy. The relocation of such a large company highlights the growing tension between traditional energy companies and states pursuing ambitious climate goals.

California Environmental Regulations

Over the years, California has adopted the nation’s strictest fuel standards. The state requires the production and sale of a unique blend of gasoline, known as California Reformulated Gasoline (CaRFG), which meets 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, increasing the overall cost of gasoline.

California gasoline also contains lower levels of sulfur than the national average. Sulfur reduction 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 may involve blending more expensive biofuels, investing in cleaner production technologies, or purchasing credits from other companies to meet carbon intensity reduction targets. The additional costs of complying with the LCFS are reflected in the price of gasoline.

Under California’s cap-and-trade program, refineries and other large emitters of greenhouse gases must purchase carbon credits to offset their emissions. These credits increase the operating costs of refineries, which in turn increases the price of gasoline. Because this program is unique to California, it adds a cost that refineries in other states do not have to bear.

Unintended consequences

California energy producers also must comply with additional regulations, primarily designed to reduce pollution. However, these strict regulations come with costs and unintended consequences.

Due to its unique gasoline blend, the state cannot easily import gasoline from other regions in the event of a supply disruption. If a refinery goes offline due to maintenance or an accident, it is difficult to quickly source replacement fuel from out of state because other regions do not produce the same gasoline blends . This limited supply flexibility can cause price increases during disruptions, leading to volatility in gasoline prices.

These price spikes can in turn lead to higher profits for some refiners in the state. If a refinery shuts down due to unscheduled maintenance, the fuel supply is suddenly reduced. This will either lead to higher prices or outages. As a result, some refiners could see their profits increase as fuel prices rise.

Although these price spikes were self-inflicted, California attempted to remedy the situation by suing oil companies and passing additional laws aimed at preventing these price spikes. At the same time, California has vilified its oil industry for years. This creates a hostile environment for these companies.

The future of California

Ultimately, California can pass any laws it wants regarding its oil industry, but these companies can also respond to them. This is what Chevron, and now Phillips 66, did.

California’s aggressive environmental policies and strict regulations regarding 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 strained relations with the oil industry.

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 its ambitious climate agenda, it may need to reassess its approach to ensuring a stable energy supply and mitigating the economic impact on consumers.

The current exodus of oil companies from California serves as a warning to other states considering similar regulatory paths, highlighting the need for a carefully calibrated approach that addresses both environmental concerns and economic stability.

These measures could further restrict California’s fuel supply and will likely result in even higher prices for California consumers.