California Wants Refiners to Hold More Inventory Just as One Prepares to Leave. That Is the Fuel Market's Real Problem

In mid-October, two announcements arrived within days of each other in California. On October 14, Governor Gavin Newsom signed ABx2-1, which gives state regulators power to set and adjust minimum inventory levels for petroleum products held by refiners, partly to reduce price volatility. Two days later, Phillips 66 announced that it would stop refining at its 139,000 barrel per day Wilmington refinery in Los Angeles in the fourth quarter of 2025. The company's chief executive later said the closure was not an immediate response to any policy change, but reflected an expectation that refining in California would become increasingly difficult.

The Energy Information Administration's description of the West Coast market starts with geography. Most West Coast refining capacity is in California, and conditions there drive the wider region. California also requires its own gasoline formulation, which few refineries outside the state produce. That narrows the pool of potential suppliers when a local refinery has an outage. The West Coast lost 285,000 barrels per day of refining capacity after Marathon closed its 161,000 b/d Martinez refinery in 2020 and Phillips 66 converted its Rodeo refinery near San Francisco to renewable diesel, ending petroleum refining there in February 2024.

After removing pipeline volumes, California gasoline inventories have consistently been lower than the US average on a days-of-supply basis. Requiring refiners to hold minimum inventories should reduce the frequency and size of those spikes. One might expect shrinking capacity to produce permanently high refining margins on the West Coast. In early May 2024, Los Angeles gasoline crack spreads fell below their 2019 to 2023 average for the time of year, as refineries returned from maintenance and gasoline consumption fell.

The lesson is that the West Coast market can swing between scarcity and glut within months. California's long-term climate policy envisions a steep decline in petroleum use as electric vehicles replace gasoline cars.