California Energy Commission calls for shelving plans to fine oil companies

In the wake of plans by two refineries to close down, the California Energy Commission offered a series of recommendations Friday to Gov. Gavin Newsom, aiming to help maintain a steady supply stream of gasoline to Golden State motorists.

Among the items in the 24-page letter to Newsom, the energy commission backed off plans to slap potential financial penalties on oil companies if the state deemed they made excess profits at the pump.

In addition, in a media briefing, energy commission vice chair Siva Gunda estimated the two anticipated refinery closures would add 15 to 30 cents per gallon in the near term — although he was quick to add that prices may drop in the long run.

In April, Valero, one of the country’s major transportation fuels producers, gave notice of intent to shut down operations at its refinery in the Northern California city of Benicia in 2026.

The CEO of the San Antonio-based company said, “California has been pursuing policies to move away from fossil fuels for the past 20 years, and the consequence of that is the regulatory and enforcement environment is the most stringent and difficult of anywhere else in North America.”

The Valero announcement came just a few months after Phillips 66 announced it will shut down its twin Southern California refinery facilities in Carson and Wilmington by the end of this year.

The Valero and Phillips 66 facilities combine to account for almost roughly 20% of the state’s crude oil capacity, leading fuel analysts to raise concerns that the closures will strain supplies of the specially blended gasoline that is sold to California drivers.

In response, Newsom directed the energy commission, along with other state agencies such as the California Air Resources Board, to “redouble the state’s efforts to work closely with refiners” to help ensure Californians have access to transportation fuels such as gasoline in the short and long term.

California is in a tricky spot.

The state has moved aggressively to meet decarbonization goals — including a mandate issued via executive order by Newsom in 2020 to ban the sale of new gasoline-powered cars, SUVs and light trucks by 2035 — while simultaneously making sure there is enough supply of gas to meet demand.

In his letter to Newsom, Gunda described the current state as a “mid-transition” phase as the state tries to shift to massing adoption to electric vehicles.

“Keeping in-state and imported fuel competitive will be an important balancing act moving forward,” Gunda wrote, “because if the cost of refining fuel in state exceeds the cost of importing fuel, it could further accelerate additional petroleum refinery exits.”

Fuel imports are important because, as Friday’s letter mentioned, California imports more than 75% of its crude oil to meet the demand from in-state refineries and about 10-20% of its gasoline from foreign and out-of-state sources.

“Gasoline imports statewide could increase to 25-30% of demand by the summer of 2026, and up to 50% in the northern California region” after the Valero and Phillips 66 closures, the letter said, “bringing risk of supply disruptions and price volatility.”

To help boost import of refined products, the energy commission letter in part called for streamlining regulatory and permitting issues that could help support “confidence for the private sector” to make investments.

As for stabilizing oil production within the state, the letter suggested the Legislature make zoning changes in Kern County — the heart of California’s Oil Patch — to “allow for a more appropriate amount of extraction.”

Finally, the commission’s letter to Newsom said near- and medium-term actions should take a more “holistic transition strategy” for developing policies to transition California’s transportation system away from petroleum-based fuels.

“The problems laid out in this letter are complex but solvable,” Gunda wrote.

As for the petroleum industry’s response, a spokesperson for the Western States Petroleum Association trade group, said in an email to the Union-Tribune, “we are still reviewing what is in the letter.”

Consumer Watchdog, a Los Angeles-based consumer advocacy group and longtime critic of the petroleum industry, labeled the California Energy Commission’s letter an “oil refiner bailout.”

“California’s oil refining and distribution sector are charging Californians more than double what they take in elsewhere,” the group said in a news release supported by 51 public and environmental organizations.

The groups also criticized the pause on potential financial penalties.

At Newsom’s urging, in 2023 the California Legislature in a special session passed Senate Bill X1-2, which created the Division of Petroleum Market Oversight to monitor California’s oil and gasoline companies.

Among its provisions, the legislation also gave the energy commission authority to penalize oil companies if they exceed a “maximum gross refining margin.” The penalty, which would have been the first of its kind in the nation, has yet to be implemented.

Asked about the recommendation to suspend the penalty, Gunda told reporters, “It’s important to provide the necessary certainty and regulatory conditions to allow for the private investments to come in.”

He added that a separate bill that passed in another special session “really gave us tools that actually increase the supply and solve this through the marketplace.”

Gunda is referring to another gasoline-related bill called Assembly Bill X2-1 that Newsom signed into law last year. It requires California refineries to maintain minimum amounts of gasoline inventories in the hopes of preventing price spikes.

California has 13 refineries operating in the state but five of them are very small. Eight major refineries account for about 96% of crude oil capacity in the state — and that figure includes the Valero refinery in Benicia and the Phillips 66 facilities in Carson and Wilmington.

Gas prices have been a long-standing complaint for California motorists.

According to AAA, the average price in the Golden State stood at $4.61 for a gallon of regular on Friday — $1.40 higher than the national average. The price in San Diego on Friday came to $4.646.

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