How to Save California’s Oil and Gas Industry
For anyone unconcerned about the state’s ongoing war against the oil and gas industry, or the impact it is going to have on California’s economic health and overall cost-of-living, a study released on May 5 should be required reading. With strong arguments and immutable data, USC Business Professor Michael Mische predicts that by sometime in 2026, we’ll be paying over $8.00 for a gallon for gasoline.
We’ve seen this coming. In WC #87, we quantify the impact of the planned shutdown of the Phillips 66 refinery in Long Beach. And in WC #89, we add to that the impact of yet another just-announced shutdown, the Valero refinery in Benicia. Assuming there aren’t any more closures, in late 2026, based on current trends, supply will fall short of demand by about 4 percent. Prices will rise, and as Professor Mische warns us, they may soar.
But what would it take to lower prices for gasoline in California? How low could prices go, if policies were changed?
To fall back on an overused phrase, and to put it mildly, this is a thought experiment. The chances that California’s governor or state legislature would do everything necessary to bring retail gasoline prices down anywhere close to the national average are slim. But it is possible. Here is how it could happen.
To begin with, Governor Newsom could declare a state of emergency based on the imminent and near certainty of an energy crisis in the state. Using his executive authority, he could suspend enforcement of SBX1-2 and ABX2-1, recent laws that have imposed costly and unreasonable burdens on California’s refineries. He could then demand the state legislature work with refinery operators to reform the entire regulatory environment in exchange for these refineries not only choosing to remain in California, but enabled to invest in the maintenance and upgrades that excessive regulation has made impossible.
Even all this, however, will only stabilize the retail price of gasoline in California by preventing demand-driven price hikes driven by shortages. As of May 21, gasoline in California sold for $4.88 a gallon, compared to today’s national average of $3.18. Newsom will have to do much more.
The next thing Newsom can do is cancel the “environmental programs,” which according to the California Energy Commission add $.54 cents per gallon to the price of gasoline in California. Much of this cost is incurred as oil refineries make mandatory payments each year into California’s cap and trade program. The state redistributes this money to investments of dubious return – high speed rail, other transit projects that also fail to pass basic cost/benefit analysis, and heavily subsidized and overpriced “affordable housing.”
One of the biggest reasons oil companies have to pay billions into the cap and trade program is the continuously escalating requirements of California’s “Low Carbon Fuel Standard” (LCFS). In plain English, this primarily involves subsidizing midwestern corn farmers to grow and ship grain alcohol thousands of miles overland to California refineries because there is an allegedly lower greenhouse gas impact when you burn gasoline laced with ethanol. To put this in perspective, if you grew enough corn in California to replace the 13.6 billion gallons we consumed in 2023, we would need over 60,000 square miles of farmland and 120 million acre feet of irrigation water, along with stupefying quantities of fertilizer.
To the extent refineries cannot meet the LCFS, they must purchase “carbon credits” through the cap and trade program.
Newsom can issue an executive order suspending the LCFS, and direct the California Air Resources Board to redirect their priorities to regulating pollutants that are genuinely hazardous to human health. And to ensure they comply, Newsom may remind CARB that 12 of their 16 board members “serve at the pleasure of the governor.”
Also driving up the cost of gasoline in California are “refinery costs and profits.” This adds $.99 per gallon to the retail price of gasoline. But “profits” is a small slice of that pie. Between June 2023 through May 2024 refiners made net profit in only 6 of 11 months, and refinery profits remain thin or negative. To get an idea of what might be possible if refineries in California could invest in efficiency upgrades and didn’t have to spend extra to comply with the LCFS, look to other states. The national average refinery costs and profits amount to $.44 per gallon, less than half what they are in California.
Before getting to the elephant in the room, which is taxes, it’s important to note that gasoline cannot easily be imported to California from out-of-state refineries because of California’s reformulated blends. But reformulated gasoline, which requires expensive and specialized refining only found in California, only reduces the rate of evaporation of volatile organic compounds. While there is some benefit to this, it is largely controlled anyway now that automobile gas tanks are airtight and vapor locks are standard on gasoline pumps. The air pollution that mattered, that fouled California skies from the Los Angeles Basin to the Santa Clara Valley back in the 1960s, has been eliminated thanks to unleaded gas and the catalytic converter. The air quality benefits of reformulated gasoline are marginal.
To bring down refinery costs, the governor can issue an executive order eliminating the requirement for reformulated gasoline, he can suspend the LCFS, and as noted, he can suspend SBX1-2 and ABX2-1.
Which brings us to taxes. California’s state excise tax amounts to $.60 per gallon. The state uses this money for constructing and operating public streets and highways, but also for mass transit and to support the cap and trade program. Eliminating everything that isn’t directly related to streets and highways, while also streamlining and reforming the design and procurement apparatus known as CalTrans, could enable this excise tax to be cut by at least 50 percent.
Altogether, if Newsom was serious about providing Californians with abundant and affordable gasoline, his actions could lower the price per gallon as follows: Eliminate “environmental programs” and save $.54 per gallon, eliminate the LCFS, reformulation, and unnecessary regulations to lower refinery costs by perhaps $.40 per gallon, and cut $.30 per gallon out of the excise tax. California’s retail price per gallon would drop from $4.88 to $3.64.
Saving California’s oil and gas industry also requires ending the regulatory war on drilling and extraction. Doing that might even lower the refinery cost for crude oil. Newsom needs to suspend implementation of SB 1137, which creates unreasonable setbacks between oil wells and “inhabited dwellings.” On this one, however, the industry is fighting back, with two lawsuits already filed to challenge 1137.
Newsom might also instruct CalGEM to start issuing drilling permits, which have dropped from thousands to dozens per year. The head of CalGEM is appointed by the governor. CalGEM is part of the California Dept. of Conservation, also run by someone appointed by the governor. And CalGEM is a division of the California Natural Resources Agency, whose current head, Wade Crowfoot, “serves at the pleasure of the governor.”
The moral argument for a healthy oil and gas industry in California isn’t a stretch. Petroleum still accounts for 50 percent of the energy consumed in the state, and natural gas accounts for another 30 percent. We should produce it here, where even relaxed, more common sense regulations will nonetheless far exceed anything in place from anywhere we might otherwise import our oil and gas. The only way we can avoid impoverishing our citizens and evicting our businesses is by nurturing our energy industries instead of harassing them.
Eventually, new fuel will replace oil and gas. In the meantime, we can create thousands of good jobs, bring down the cost of living, and set an example of responsible use to the rest of the world.
Edward Ring is the Director of Water and Energy Policy at the California Policy Center, which he co-founded in 2013. Ring is the author of Fixing California: Abundance, Pragmatism, Optimism (2021) and The Abundance Choice: Our Fight for More Water in California (2022).