The Barrel and the Ballot: California’s Looming Energy Crisis
How California’s Energy Stability and Newsom’s Path to Washington Depend on Sable Offshore and the Santa Ynez Unit
Introduction
California has long positioned itself as a global leader in environmental and energy policy, championing ambitious mandates on emissions, electrification, and renewable energy in an effort to model a post-carbon utopia rivaled only by the visions of Marx, Stalin and Zedong.
Yet beneath this vision lies an inconvenient reality for California policy makers: the pursuit of a non-impact environmental standard has exposed the state to increasing fragility. Refining capacity is shrinking, energy costs are among the highest in the nation, and dependence on imported oil has never been greater.
The state’s strategy, characterized by running refinery capacity out of the state, punitive permitting processes, and a push toward electrification, also has not significantly reduced fossil fuel consumption. In fact, despite decades of intervention by the powers that be in California fossil fuels still account for roughly 80% of California energy, a mere 2% lower than global averages.
Meanwhile, the burden of this transition has fallen disproportionately on consumers, and specifically lower-income communities in the state. Since 2018, more than 360 energy related companies that include major oil producers, pipeline operators, and support services have left California, frequently citing excessive red tape and regulatory hostility as primary factors, not to mention the state’s aggressive plan to ban sales of internal combustion engine vehicles by 2035 further discourages long-term investment in energy infrastructure.
The effect on California energy producers has been obvious: why consider spending billions of dollars in refining, storage, and distribution projects in a state that has openly signaled the eventual obsolescence of these assets which will lead to wasted resources and no or low returns?
California’s energy system is walking the ultimate tight rope. With a rapidly shrinking refining base, the state faces an increasingly narrow margin between supply and demand, a vulnerability made sharper by the planned closure of the Phillips 66 and Valero refineries by 2026. Operating as an oil island, California’s refineries supply the state and parts of neighboring Arizona, Nevada, and Oregon, yet rely heavily on imported crude equaling approximately 70% of total domestic supply much of which is sourced from countries with lower labor, environmental, and human rights standards.
The system’s fragility is further exposed by both operational and geological risks including refinery fires, mechanical failures, and earthquakes that threaten to reduce capacity further, leaving millions of barrels of demand unmet and inventories quickly depleted as the state only ever operates a roughly two-week surplus. With no strategic petroleum reserve and thin working stockpiles any disruption can trigger immediate price spikes and regional fuel shortages, illustrating the high economic and social stakes of the state’s misguided energy policy.
At the heart of California’s oil production lies Kern County, where restrictive permitting, water scarcity, and declining domestic output highlight the structural challenges of not just maintaining, but growing state supply. Heavy oil production onshore in Kern County depends on water-intensive thermal recovery methods, yet environmental and regulatory constraints limit expansion, making it impossible to fully offset refinery closures.
Meanwhile, older refineries atop active fault systems remain at risk of catastrophic damage further amplifying the systemic vulnerability in the states energetic plumbing. California policies added another layer of complexity that include aggressive taxation, and environmental compliance costs that perpetually inflate gasoline prices while simultaneously constraining domestic production and refining operations. The result is a high-cost, high-risk energy system that is highly sensitive to disruption and increasingly dependent on imports.
All of this, while Sable Offshores Santa Ynez Unit (SYU) provides a rare opportunity to strengthen California’s energy security. By providing lighter, water-efficient crude directly to coastal refineries, Sable can help offset declining capacity, reduce import reliance, and support higher refinery utilization, all while limiting environmental impact that the SYU opposition purport to care so much about. The state of California is at a point of inflection, and the only option is a drastic reversal in the states campaign of lawfare against its own domestic resource base.
Structural Price Pressure: Higher Prices in California Are a Choice
California’s energy landscape is shaped much more by poor policy decisions than it is by market forces, and the state’s decisions over the last several decades illustrate the striking contrast between punitive governmental decisions and physical consequences of decimating one’s own baseline energy supply.
Gasoline prices in California the highest in the nation, in large part because of aggressive taxes and cumbersome environmental compliance fees. In July 2024, when the statewide average gasoline price was $4.49 per gallon, $1.23 came from state taxes, fees, and environmental programs, with another $0.18 in federal taxes.
Industry costs and profits accounted for $1.04 per gallon, while crude itself contributed $2.04. Over the past fifty years, the gasoline excise tax has risen 253%, even as the number of refineries has dropped by 56% and in-state crude production has fallen 63%. Meanwhile, imports of foreign oil surged 712%, reflecting the consequence of driving the state toward greater dependence on foreign crude while handicapping one’s own energy value chain.
California’s regulatory complexity exacerbates these costs. The Low Carbon Fuel Standard (LCFS), a centerpiece of climate policy, would have imposed over $1 billion annually in new costs for refiners and added up to $1.15 per gallon in consumer fuel expenses. While temporarily paused, its effects are already apparent. EV manufacturers such as Rivian profit from LCFS credit sales and data capture while taxpayers subsidize $1.9 billion to build charging infrastructure that generates further private revenue and adds costs for the poorest Californians.
Likewise, California is the only state to mandate specialized reformulated gasoline blends. Reformulated gasoline alone costs roughly $0.30 more per gallon than conventional fuel, and California’s blend is already the most expensive in the nation. Cap-and-Trade obligations, seasonal adjustments, and at-berth emissions require further inflate costs. Collectively, these policies create a scenario where state directed compliance burdens often exceed refinery profits, illustrating how policy choices dominate the price at the pump rather than free markets.
Policymakers in California, led by Governor Newsom, have conveniently recognized the fragility of this system but have proposed responses that reflect the contradictions in California’s historical approach. The California Energy Commission’s 2024 Transportation Fuels Assessment emphasized stabilizing supply through imports and maintaining in-state refining capacity, ensuring confidence for investment, and developing a holistic fuels transition strategy.
Proposed solutions included interagency coordination, regulatory streamlining, and prioritizing existing oilfields outside health protection zones, such as the Kern County fields. While this all sounds nice as a response to Newsom requesting a second look at state energy policy, it is all just words and flies in the face of the state’s foolish policy toward oil and gas producers for the last number of decades, the behavior will not be forgotten overnight.
Newsom’s response underscores the idiocy of the state’s broader strategy. By layering costly regulations, taxes, and mandates while simultaneously constraining domestic production and refinery operations, California has produced an energy system that is both fragile and expensive. Reliance on imports, high compliance costs, and a refinery base in free fall leave the state uniquely vulnerable to supply disruptions and associated price spikes.
Rather than strengthening domestic supply the state continues its path to outlaw Internal Combustion Engines (ICEs) hampering investment and acts as a bully against its oil and gas producers in the state. As refiners continue to exit the state, one may wonder what other options exist from adjacent refining bases. Washington state refining supply will not be adequate as it has much smaller demand and also provides Oregon with their critical energy needs – adjacent states rely on California as well and will not be able to meet the demand either. Finally, the state itself could try to operate the refining base and while I fully believe state officials think that is a viable option, anyone with a brain can see that it is doomed to fail.
California Dreamin’: The States Response
After Newsom was knocked over the head by his misguided energy decisions, he commissioned Vice Chair Gunda at the California Energy Commission in a letter the rethink state energy policy and her response can be summarized in three main recommendations.
1. Stabilize fuel supply through imports of refined fuels and maintaining in-state refining capacity.
Gunda Solution: The solutions identified within this strategy include developing regulatory coordination at all levels of government to consider specific impacts sector-wide; addressing permitting issues; and forming an interagency work group.
Response: Wow – interagency work groups and additional regulatory coordination? Seems like an efficient and fast solution to California’s ticking time bomb of an energy policy, right? The only part of this that has any meat on the bone is expediting permits and we would agree – allow for Sable to obtain basic things like their Parks Easement and release the Office of State Fire Marshal to approve the restart plan and perform under the federal consent decree – oh and this also would remove $7-$10B in state liability from going through the takings claim process with Sable.
2. Provide sufficient confidence to invest in maintaining reliable and safe infrastructure operations to meet demand
Gunda Solution: The solutions identified within this strategy include increasing in-state production of crude in a targeted way, specifically by prioritizing existing oilfields outside health protection zones (HPZs) for new extraction and declaring the Kern County Zoning Ordinance’s second supplemental environmental impact report (EIR) in compliance with the California Environmental Quality Act (CEQA); pausing implementation of a maximum gross gasoline refiner margin and penalty, as advanced under SB X1-2 (Skinner, Chapter 1, Statutes of 2023); and encouraging CARB to meet with terminals and refiners to discuss at-berth implementation, a regulation that requires emissions control technology for all ocean-going vessels at California ports.
Response: Again, this plan basically says nothing and provides no solutions, just more government bureaucracy and wasting of time that the state doesn’t have the luxury of wasting. If the goal is to obtain more investment which we would agree with, maybe stop the push to move away from ICE engines by 2035 – what confidence does any oil and gas producer have in making billions of dollars in investment knowing the resource they are tasked with producing is universally hated and targeted by the very state and citizenry it stands to benefit? I can’t say I blame Exxon or Chevron for looking elsewhere.
3. Develop and execute a holistic transportation fuels transition strategy
Gunda Solution: The solutions identified within this strategy include long-term considerations, such as funding to support climate, health, community, and worker priorities; asset retirement obligations for refinery remediation and decommissioning; evaluating other fuel supply options; increasing marine terminal capacity; and developing strategies around potential state management or ownership of assets.
Response: Believe it or not this also comes across to us as boilerplate, inactionable garbage. However, the state has goals of increasing production to 125M on an annual basis and currently produces roughly 94M or 259K per day. Not to mention if the state wants to “increase marine terminal capacity” it may want to invest in its Ports which rank 369 and 370 in the world out of 370 in terms of quality – but again, who is going to invest in upgrading those ports?
The Mass Exodus of California State Refining Capacity
California’s energy system rests on a fragile refining base that is shrinking rapidly. With the Phillips 66 refinery scheduled to close in 2026, total refinery capacity will fall to 1.48 million barrels per day, against a consumption of 1.39 million barrels per day based on 2024 data, leaving only a 6.3% surplus over demand which represents a dangerously narrow margin in a state with no pipeline connections to other U.S. refining regions.
California’s refineries not only supply local consumers who use more than 48 million gallons of gasoline daily, but also serve parts of Arizona, Nevada, and Oregon. When a single refinery incident occurs, the system quickly buckles, as illustrated by the 2023 Martinez fire. If a similar event happens after 2026, capacity could drop to 1.32 million barrels per day, creating a 4.9% deficit, or a 68,000 boe/d shortage, and over a 100-day outage which is roughly what happened in Martinez, this will result in 6.8 million barrels of unmet demand, with post recovery capacity barely exceeding demand by 1.9%.
The risk of the system is compounded by geological risk as many of California’s refineries sit atop active fault systems including the Wilmington Blind Thrust Fault beneath the Los Angeles and Long Beach harbor area which is capable of a magnitude seven earthquake that could severely damage refineries at Marathon, Phillips 66, and Valero, disrupting over 50% of the states remaining capacity.
Unlike other regions, California maintains no strategic petroleum reserve of its own, relying instead on the working inventories of refiners and distributors, which typically cover only 15 to 20 days of supply. In 2023, these inventories dipped below 15 days on 63 occasions, triggering rapid price spikes. This is not just a California problem as neighboring states like Nevada and Arizona are highly dependent on California’s refineries, with 88% and 48% of their supply coming from California.
Price shocks therefore spread across the Southwest, affecting millions beyond California’s borders. Multiple investigations, including those by the FTC, the Federal Reserve, and the state itself, confirm that these price spikes are not driven by corporate profiteering but instead the self-inflicted tight rope the state must walk to meet basic energy needs of Californians.
By 2026, the state faces what could be described as a perfect storm for its energy system. With the Phillips 66 refinery closed and Valero’s Benicia facility scheduled to shut, total refining capacity would fall to roughly 1.25 million barrels per day, down from 1.48 million barrels per day, creating a shortfall of nearly 140,000 barrels per day, about 10% below demand, even before accounting for unexpected events.
A major fire at Chevron’s El Segundo refinery, which produces around 20% of Southern California’s motor fuels and 40% of its jet fuel with an estimated capacity of 157,000 barrels per day, would dramatically exacerbate the problem. A Martinez-style 100-day outage at El Segundo would drop total statewide capacity to approximately 1.09 million boe/d, creating a shortfall of 296,000 boe/d and leaving about 12.4 million gallons of gasoline unavailable each day.
Given that California’s working gasoline inventories typically cover only 15 to 20 days or 720 million to 960 million gallons a 100-day El Segundo shutdown would consume more than 1.24 billion gallons, far exceeding existing stocks and leaving the state swimming naked with no supply buffer. Assuming partial recovery over 150 days, with El Segundo regaining half its capacity, the state would still operate about 4% below demand, leaving minimal spare capacity and extreme vulnerability to additional disruptions from fires, mechanical failures, or other unforeseen events and would send prices soaring.
The implications of such a scenario on consumer energy prices are severe. Gasoline prices, projected to reach $8 to $8.50 per gallon from refinery closures alone, could spike even higher under this combined scenario, with Southern California facing acute shortages of both motor and jet fuels. The state’s isolation from other U.S. refining regions means emergency supply would have to arrive by ship or truck, further increasing costs and delaying recovery. Planned refinery closures combined with an unplanned incident at a critical facility like El Segundo could result in a prolonged, statewide fuel deficit, and significant economic disruption. The current situation leaves California teetering and is not a crisis “coming” but is active in the state with no end in sight.
Kern County Won’t Save California Energy
Kern County sits at the heart of California’s declining oil and gas industry. Once the backbone of the state’s energy production, it now illustrates the unintended human and economic costs of restrictive energy policies. Unemployment in Kern stands at 7.8%, well above the statewide average of 4.9%, reflecting the erosion of high-wage industrial employment, a trend accelerated by the states near moratorium on drilling permits.
In the first half of 2023, California approved only seven new permits, compared with over 200 in the same period the previous year, while more than 1,400 permits remain pending, constraining energy production and investment. This collapse in permitting has stranded assets across Kern’s mature oil fields, leaving roughly 102,000 unplugged wells, about 40% of which are idle, and nearly half dormant for more than fifteen years.