California regulations could limit supply and raise gasoline prices, says Chevron executive Chevron

Table 1.

Figure 1.

Crack spreads between the West and the Persian Gulf ($ per barrel | 2011–2023).
Calculated based on publicly available information

Since 2000, the US Gulf Coast has increased its refining capacity by 27%.⁵. Gulf Coast refineries have chosen to invest in additional production capacity, making their markets less susceptible to supply and demand imbalances. If you look at the overall refining margins on the West Coast and the Gulf, you’ll start to see why. While there are fundamental differences between the West Coast and the Gulf Coast in terms of supply and demand that call into question the reliability of price comparisons between the two regions, it is worth noting that – as shown in Figure 1 – over the 12-year period, there was almost never a margin premium West Coast refineries, as measured by the 5-3-2 crack spread. The crack spread measures the difference between the purchase price of regionally available crude oil and the sale price of major refined products. Crack spreads are a measure widely used by energy market experts to help monitor refinery margin potential.⁶ The 5-3-2 crack spread measures the difference in prices of 5 barrels of crude oil, producing 3 barrels of gasoline and 2 barrels of heating oil. There was no margin premium on the West Coast during the initial 2022 gasoline price increase, and therefore there was no indication that refinery margins were the primary cause of price differentials in California when emergency legislation was drafted to blame refineries.⁷

The key to understanding what’s happening with gasoline prices is to understand why so many refineries have left the market. There is no secret. Instead of supporting innovation, state policy actively sought to put refineries out of business. For decades, California has required refineries to produce a particularly expensive blend of gasoline while limiting supplies from state wells that refineries rely on for cheap crude oil, squeezing refineries from both ends.⁸ The state recently announced a rule aimed at phasing out sales of new gasoline cars by 2035 in an effort to curb gasoline demand.⁹ Add in a host of other state and local regulations and taxes, and it’s no surprise that there is less incentive to invest in California. As we mentioned earlier, California’s policies make it difficult to invest, which is why we have rejected capital projects in the state. Capital flight reflects insufficient state profits and an adversarial business climate.

The effects of this policy were far-reaching. For example, politicians and regulators have recently suggested that refinery maintenance is driving high gasoline prices by disrupting supplies.¹⁰ However, supply disruptions can only lead to high prices because California has effectively banned the opening of new refineries or the expansion of existing ones, leaving very few refineries able to make up the shortfall in the event of supply disruptions. In any case, this maintenance is crucial to ensuring the safety and reliability of state refineries, and the refinery cannot abandon or defer necessary maintenance work.

These decades-long negative consequences are compounded by geography, another factor the refinery cannot control. California is cut off from the rest of the United States by the Rocky Mountains, so oil and gasoline cannot arrive by pipeline. Meanwhile, the delivery of fuel imported from abroad takes weeks, and importing is expensive.¹¹ This means that when gasoline prices rise due to supply disruptions, it takes a long time to supply the state with our uniquely formulated finished gasoline.¹² Regulators should focus on these problems and not blame refineries for them.

In short, California politics and geography – i NO the alleged greed of the refineries – are responsible for the price spikes. Since refinery profits are not the problem, penalties imposed on profits will not help. It can only hurt.