$8 Gas?! How California Policies Are Driving Up Prices at the Pump

This week, headlines started circulating warning that gas prices across the state could hit $8.43 per gallon by 2026. So… what’s going on? Why are prices skyrocketing – again? Well, spoiler alert: it’s not a supply chain issue, and it’s not just about oil. Like so many things in this state, it traces right back to policies put in place by our government.

What is Happening?

Even by California standards, a potential $8.43 per gallon price of gas is shocking! What in the world is going on?

The short answer is that two major refineries in California are shutting down – and that’s going to hit our gas supply hard. First up is the Phillips 66 Los Angeles Refinery, located in Carson and Wilmington. This facility has been operating since the early 1900s and currently processes around 138,000 barrels of oil per day, producing about 85,000 barrels of gasoline daily – which adds up to roughly 8% of the state’s entire gasoline supply. [1] It’s scheduled to shut down by the end of 2025. Why? Well, it’s a mix of factors: California’s declining oil production, the refinery’s aging infrastructure, and – to no one’s surprise – mounting regulatory pressure. We’ll get deeper into that in a bit.

Then in April of 2026, the Valero Benicia Refinery in Northern California is expected to follow suit. It processes about 145,000 barrels a day, and it's a key player in supplying fuel across the northern half of the state. [2] Valero says the closure comes down to sky-high operating costs, California’s complex regulations, and a billion-dollar financial hit they had to take on the facility.

Put together, these closures will cut California’s refining capacity by about 21%. That is huge. And like we’ve talked about before — when supply drops but demand stays the same, prices go up. Californians are still driving, and the majority still need gas to power their cars – so with this kind of supply hit, that more than $8 gas prediction starts to make a lot more sense.

The main question is then: what are the causes for these closures? Why are refineries reporting declining oil production, skyrocketing production costs, and regulatory challenges? It’s important to note that this problem isn’t new for California. In the 1980s, our state had around 50 oil refineries to provide fuel for our population’s growing needs. As of today, there are only 14 refineries that remain open.[3] Did you catch that? We went from 50 refineries to just 14 refineries – that’s a 72% decrease – in less than 50 years! And that’s before these two closures, meaning by 2026, our state will be down to just 12 refineries. 

The reality is that this decrease in refineries over the years, and the closure of these two additional refineries in the next year, are all due to legislation enacted throughout the past decades. Let’s go through it.

1992 – The Cleaner-Burning Gasoline Program

Starting as far back as 1992, our state introduced the Cleaner-Burning Gasoline Program. This was created by the California Air Resources Board, or CARB, as part of California’s broader effort to fight smog and reduce air pollution from vehicles. In the late 1980s and early 1990s, California’s smog problem was severe, especially in areas like Los Angeles. Vehicles were deemed the largest contributors to air pollution. Even with stricter tailpipe emission rules, the California Air Resources Board ruled that what went into the gas tank still mattered. So, CARB mandated that fuel itself needed to be reformulated to reduce carbon monoxide, nitrogen oxides, reactive organic gases, and particulate matter.[4] At its core, this program set strict fuel formulation standards requiring gasoline sold in California to be significantly cleaner than what's required under federal standards.

What changed in the gasoline? California’s cleaner-burning gasoline included specific limits on aromatics, sulfur content, olefins – which contribute to smog, Reid Vapor Pressure or RVP – which is important for ozone formation, oxygen content, and distillation temperatures.[5] These changes made California’s gas the cleanest in the U.S., but also the most expensive to produce.

The program was successful in the sense that emissions dropped significantly, reporting reduced smog-forming emissions by over 15% from 1992 levels.[6] This meant that air quality improved, even as vehicle numbers grew. Now, this program doesn’t sound all that bad, right? After all, isn’t less smog and air pollution worth paying a little extra at the pump? While I definitely agree that we should work to reduce air pollution where possible, we also have to give fair hearing and consideration to the impact that this program had on refineries in our state, as well as on consumers. The Cleaner-Burning Gasoline Program laid the foundation for California’s entire regulatory approach to fuels. It explains why gas in California costs more, can’t be easily imported from other states, and is so heavily impacted more by refinery closures. So, while it’s easy to look at it and say less air pollution is good, therefore this was necessary, let’s also consider the concerns that conservatives had at the time and how they have led to what is happening today.

First, it increased fuel prices for consumers, especially those in lower- and middle-income brackets. Reformulating gasoline to meet these new environmental standards required significant investments from refineries, which of course translated to higher prices at the pump. And unfortunately, ordinary Californians are the ones who bore the burden, and who still bear the burden today, of these costs.

Then there was the economic burden on refineries. The cost of compliance with the new fuel standards was steep for them to implement. These changes required expensive equipment upgrades and ongoing operational costs, making it harder for local refineries to compete. The concern at the time of the program was that over-regulation would eventually drive refiners out of the state, reduce supply, and eliminate jobs – and that is exactly the trend we’ve seen unfold over the decades.

Plus, there are questions as to whether the environmental benefits of the program justified the economic disruption it caused. While the program did reduce smog-forming pollutants, it’s fair to wonder if the marginal gains were too small to warrant such a sweeping and costly mandate. This is another pattern we see with environmental policy in California – we often over-regulate without enough scientific or economic justification.

From a philosophical standpoint, this overregulation is an example of government overreach – with the state mandating how businesses must operate rather than allowing market forces or voluntary innovation to lead environmental progress. The state set a dangerous precedent by micromanaging industries and setting itself apart from national standards.

And of course, one of the largest impacts of this program was that because California’s gasoline formulation became unique, it limited the state’s ability to import fuel from other states during shortages. This created a “fuel island” effect, increasing volatility and price spikes during refinery outages or crises. We still operate in this fuel island today, and it’s even worse for us now that we have less refineries to make our special gasoline.

2006 – The Global Warming Solutions Act (AB 32)

All of that was just from one program – doesn’t that just even further drive home the point that policy matters? But sadly, the Cleaner-Burning Gasoline Program was just the beginning of the ever-increasing regulatory landscape in California up to today.

Next came the Global Warming Solutions Act of 2006, also known as Assembly Bill 32. This was a landmark California law that committed the state to reducing its greenhouse gas emissions to 1990 levels by 2020.[7] It was actually the first major climate legislation in the U.S. to set economy-wide limits on greenhouse gas emissions – and it, much like the 1992 Program, laid the groundwork for California’s broader climate policies today.

So, how did AB 32 work? This Act used a multi-pronged strategy to cut emissions:

First was through Cap-and-Trade, which is a market-based system where companies buy or trade permits to emit carbon. Cap-and-Trade is like setting a budget for pollution. The state puts a limit – or 'cap' – on how much carbon pollution companies are allowed to release. Big polluters, like oil refineries or power plants, have to buy permits for every ton of carbon they emit. If they pollute less, they can sell their extra permits to other companies that need them—that’s the 'trade' part. The key is that every year, the total number of permits goes down. That means the pollution limit gets tighter over time, which pushes companies to clean up their operations or pay more to pollute.

Next was the Renewable Portfolio Standard. This requires utilities – like PG&E or SoCal Edison – to get a certain percentage of their electricity from renewable sources like solar, wind, geothermal, and small hydro power.[8] So instead of relying on coal or natural gas, the state says something like: ‘By year 2030, 33% of your power has to be renewable. By year 2040, 60%.’ And so on. And the targets keep going up. The long-term goal of the Renewable Portfolio Standard in the 2006 Act was 100% clean electricity by 2045. If utilities don’t meet the targets, they face penalties – so there’s a real incentive to invest in green energy projects.

And lastly, there were Energy Efficiency Mandates,[9] which were basically building codes and appliance standards that were tightened to cut energy use. So, the state set strict rules on things like how much electricity your fridge could use, how efficient your air conditioning had to be, and how well new buildings have to be insulated, ventilated, and lit. Over time, in theory, these mandates are supposed to be saving energy and money. They were created with the intent to reduce the need for more fossil fuels, lower utility bills, and cut emissions without anyone really noticing.

What were the results of the 2006 Global Warming Solutions Act? Well, in terms of the reduction of greenhouse gas emissions, the act was successful, with California hitting the goal of 1990 levels by 2016.[10] But, as with the 1992 Program, there were other consequences of this Act as well.

Once again, gas prices rose even higher. Refiners were now required to buy emissions permits, meet stricter environmental standards, and reduce the carbon intensity of their fuels – all of which drove up fuel costs. This helped cement California’s persistent price premium on gas, a problem we’re still dealing with today. The Cap-and-Trade program, in particular, acted like a stealth tax on businesses that ultimately got passed down to consumers. Electricity, gas, and transportation costs rose across the board, hitting working-class families the hardest.

It also accelerated the decline of in-state oil and gas production, making California more dependent on foreign energy imports – a shift that not only affects gas prices, but also weakens our energy security and leaves us more exposed to global market disruptions.

Then there’s the bigger question: even if California meets its ambitious emissions goals, will it matter on a global scale? With California responsible for just a small fraction of global emissions, many argue that these costly and sweeping government controls amount to little more than symbolic climate gestures – with consumers paying the costs.

2011 – Low-Carbon Fuel Standard

Let’s jump to 2011 – the year California officially implemented the Low Carbon Fuel Standard, or LCFS.[11] This policy requires fuels to get cleaner over time based on their carbon intensity – so not just what comes out of your tailpipe, but the full life cycle of the fuel: how it’s made, transported, and burned. Each fuel is given a carbon intensity score, and fuel producers, like oil refiners, have two choices: either lower the carbon intensity of their products or buy credits from cleaner alternatives like biofuel producers or EV charging companies. It’s basically a diet for dirty fuel: you can clean it up or you have to pay someone else who did. And every year, the standards get stricter.

2011 marked the first year that producers were required to comply. That meant every company supplying fuel in California had to track the carbon impact of their products and reduce it annually – or purchase enough credits to cover the difference. The oil and ethanol industries quickly pushed back, suing on the grounds that the policy violated the Commerce Clause by discriminating against out-of-state fuels. The courts temporarily paused it, but in 2013, the LCFS was reinstated, and it remains one of the most aggressive clean fuel policies in the world. But like many of California’s environmental regulations, the LCFS added major costs for refiners, making it more expensive to produce gasoline and pushing some operations closer to shutting down. Over time, these added pressures have contributed to California’s higher gas prices and shrinking in-state fuel production.

2024 – Assembly Bill X2-1

That brings us to today. Just last year, California introduced new refinery inventory mandates. These mandates require oil refiners to maintain minimum fuel stockpiles, aiming to prevent price volatility and protect consumers from sudden price spikes.[12]

The legislation, known as Assembly Bill X2-1, empowers the California Energy Commission, or CEC, to set and enforce minimum inventory levels for transportation fuels across the state. The primary goal is to ensure a stable fuel supply, especially during periods of refinery maintenance or unexpected disruptions, which have historically led to sharp increases in gasoline prices.[13] The catalyst for this legislation stemmed from findings that, in 2023, California refiners operated with less than 15 days of gasoline supply on 63 occasions, contributing to significant price spikes.[14]

Under ABX2-1, California is putting a lot more responsibility on oil refiners. They’re required to always keep a minimum amount of fuel in storage, kind of like an emergency backup, to help prevent price spikes if something goes wrong. If they’re planning to shut down part of the refinery for maintenance – which usually slows down production – they now have to let the state know in advance and submit a plan for how they’ll keep fuel supplies steady. They also have to make the most of the storage tanks they already have, because the law doesn’t allow the state to force them to build new storage facilities. And if they break these rules, they can be fined up to $1 million per day — after a three-day warning.[15] So basically, the state wants to avoid fuel shortages, but it’s putting a lot of pressure and cost on the refineries to make that happen.

While the proponents of the new law say they are aiming to protect consumers, they have faced criticism from the oil industry. Opponents argue that maintaining higher inventory levels increases operational costs and could lead to higher average gasoline prices. They also express concerns about the potential for artificially induced shortages in downstream markets.[16]

ABX2-1 marks the tipping point in the long trend of regulatory and financial pressure on oil refineries. How?

First, it has increased operating costs. Maintaining larger fuel inventories requires more working capital, more space, and more risk management. Refineries, already burdened by California’s complex regulations, now face higher carrying costs for fuel they must store, cash flow strain – especially when profits fluctuate, and compliance costs for reporting, planning, and risk of non-compliance penalties. For refiners operating on thin margins, like the Phillips 66 refinery that is now closing, this makes staying open less financially viable.

Second, it created tighter operational flexibility. Under ABX2-1, refiners must notify the state before doing maintenance that could impact supply, submit resupply plans, and get approval from the state for certain operational changes. This reduces a refinery’s ability to act quickly in volatile markets. Less flexibility means more risk in a high-cost, tightly regulated environment.

Third, it added pressure on aging infrastructure. Many of California’s refineries are over 50–100 years old. They already require costly upgrades to meet air quality and emissions standards, adaptation for lower-carbon fuel production, and now, compliance with fuel stockpile mandates they were never built to accommodate. So, for companies like Valero and Phillips 66, the choice becomes clear: It’s cheaper to shut down than retrofit.

Lastly, it signaled to the market that California is a difficult place to operate. ABX2-1 is part of a pattern of legislation that disincentivizes long-term investment in fossil fuel infrastructure, imposes new compliance burdens without offering operational support, and sends a strong signal that the state is moving toward electric vehicles – even while consumers are not. For oil companies, the writing is on the wall. Rather than spend billions retrofitting for stricter rules, they’re choosing to exit.

What Should We Think About These Policies?

Okay, that was a lot of information. The bottom line is that these policies were all passed in the name of cleaner air and climate change, and they have had some environmental benefits. But they’ve also created an increasingly hostile business environment for in-state oil refineries. With rising costs, stricter rules, and limited profitability, it makes sense that major refineries like Phillips 66 and Valero are now shutting down operations in California. That’s how we get to headlines predicting $8.43 per gallon gas. It’s not just inflation. It’s not tariffs. It’s the result of decades of deliberate policy choices – choices that are now hitting your wallet every time you visit the gas station.

So, what should you think about these policies? How do we balance environmental concern – like a real desire for air that is free from pollution – with the negative outcomes we are experiencing from these policies? I think there are some key problems with the approach that our government has historically taken, and continues to take today, on this issue. It’s not bad to want clean air, but as always, the way you go about getting it matters.

These policies punish supply, not demand. All of the policies we talked about today target refineries, forcing them to absorb extra costs for storage, reporting, planning, and new compliance standards. But consumer demand for gasoline hasn’t fallen proportionally, especially as EV adoption has slowed. The foreseeable result is that there are fewer suppliers, but the same demand, thus leading to price spikes.

This leads to unintended consequences for working Californians. California already has the highest gas prices in the nation. Shutting down local refineries increases dependence on foreign oil and imported gasoline, which: has less environmental oversight, costs more to transport, and leaves California more vulnerable to global changes, like I mentioned earlier. This hurts lower- and middle-income families the most – especially those who can’t afford EVs or who are required to commute to work.

Ultimately, these outcomes only get worse over time because regulatory whiplash discourages clean innovation.  Refiners say they’re willing to invest in renewable fuel production, but the uncertainty and cost of California’s regulations make that impossible. For example, some were transitioning to renewable diesel or biofuels, but the layers of fees and penalties that were piled on ultimately discouraged long-term planning. So, California creates the very problem it’s trying to solve – it disincentivizes oil refineries and others involved from actually producing cleaner energy and thus spirals us into a cycle of lower supply, stricter mandates, and less producers.

What’s the alternative? Well, there are some less extreme but still environmentally meaningful options on the table that our state could have chosen to enact and can still pivot its approach toward.

First are to implement gradual, predictable regulations. This would mean phasing in fuel stockpile requirements over time, allowing refiners to adjust. It would also mean the state would provide clear, long-term timelines for emission reduction goals so businesses can invest wisely instead of reacting to sudden mandates. Part of this is being realistic. Our legislators should take stock of say how much reducing certain greenhouse gas emissions will actually help the environment overall. It should prioritize actionable policies – like ones that will tangibly reduce pollution – and refuse to implement ones that follow a radical agenda that won’t actually benefit the people paying its cost.

A second idea is to incentivize cleaner fuels instead of mandating them. This is the free market at its finest. Everyone operates better off of striving to get rewarded rather than by working to reduce fines and penalties. The state could do more to offer tax credits, grants, or regulatory fast-tracks for refiners who produce renewable diesel, sustainable fuel, or low-carbon gasoline blends. This would encourage investment in clean energy rather than demoralize businesses like refineries, eventually forcing their closure.

Third, California should expand its domestic oil production and build gasoline resilience. We should be supporting strategic storage partnerships – which are collaborative agreements, often between the government and private companies, to maintain and manage backup fuel supplies. Or we should champion regional reserves – which are stockpiles of fuel stored in specific geographic areas, usually near major population centers or transportation hubs – to help reduce price volatility, instead of putting the full burden on individual refiners. Our state should also allow modest upgrades to refinery infrastructure that reduce emissions without requiring full compliance with EV-era goals yet. This phased approach would help to set them up for success rather than run them out of business.

And then, when it comes to consumers, if you really want consumers to move away from needing gasoline and toward electric vehicles, then provide better consumer incentives and actually address consumer concerns about electric vehicles – like the lack of EV infrastructure. Instead of mandating a shift toward electric vehicles, our state should once again work WITH and not AGAINST the free market. If you want consumers to want EVs, then support businesses that are innovating in those areas and allow them to change consumers’ minds. And for the areas within governmental control – make those areas better too! Consumers are concerned, and rightly so, about our old and overloaded power grids. So, do something about it! Don’t just yell at consumers for having grounded fears, work with them and with businesses to create real solutions.

At the end of the day, we don’t oppose cleaner air – we oppose policies that reduce gasoline supply due to business closures before demand has dropped, causing outrageous increases in prices. California should incentivize transition, stabilize the market, and regulate in a way that is not punitive, but is smart and effective. This approach could maintain environmental progress without pushing working families into crisis or forcing refineries to shut down prematurely.

So, as always, stay informed, refuse to be manipulated, and see clearly the effects that legislation and policies have in our state. And, unfortunately, you need to be prepared to spend more on gas over the next two years. Brace yourself, budget wisely, and keep speaking up – because awareness is the first step to change.

References:

[1] Bridges, Eunice, and Jasmine Davis. “California Refinery Closures Panic Politicians.” Argus Media, May 9, 2025. https://www.argusmedia.com/en/news-and-insights/latest-market-news/2685013-california-refinery-closures-panic-politicians.

[2] Ibid.

[3] George, Drew. “California’s Refinery Exodus: How Regulatory Burdens Are Reshaping the State’s Fuel Market.” PPM Consultants, April 15, 2025. https://www.ppmco.com/californias-refinery-exodus-how-regulatory-burdens-are-reshaping-the-states-fuel-market/.

[4] “Cleaner Burning Gasoline: An Update | California Air Resources Board,” January 1, 2006. https://ww2.arb.ca.gov/resources/fact-sheets/cleaner-burning-gasoline-update#:~:text=Cleaner%2Dburning%20gasoline%20is%20fuel,(See%20Number%206.).

[5] Ibid.

[6] “Consumer Reports Study Supports California’s Cleaner-Burning Gasoline | California Air Resources Board,” October 22, 1996. https://ww2.arb.ca.gov/news/consumer-reports-study-supports-californias-cleaner-burning-gasoline#:~:text=Separate%20testing%20by%20ARB%20and,by%2030%20to%2040%20percent.

[7] “AB 32 Global Warming Solutions Act of 2006 | California Air Resources Board,” September 28, 2018. https://ww2.arb.ca.gov/resources/fact-sheets/ab-32-global-warming-solutions-act-2006.

[8] State Climate Policy Dashboard. “Clean Energy and Renewable Portfolio Standards,” n.d. https://www.climatepolicydashboard.org/policies/electricity/clean-energy-standard?gad_source=1&gad_campaignid=16590549974&gbraid=0AAAAAocFe7uC-fL61_jFRBDNiK3zB-a8N&gclid=Cj0KCQjwxJvBBhDuARIsAGUgNfhKFGoN03cwgmdGBtLTdAu99nd169TJtC8w4QuesRgHEaDzGOw3DpcaAiDUEALw_wcB.

[9] “AB 32 Global Warming Solutions Act of 2006 | California Air Resources Board.”

[10] CLEAR Center. “How California Is Working to Reduce Greenhouse Gas Emissions,” January 14, 2022. https://clear.ucdavis.edu/explainers/how-california-working-reduce-greenhouse-gas-emissions.

[11] George, “California’s Refinery Exodus: How Regulatory Burdens Are Reshaping the State’s Fuel Market.”

[12] Governor Gavin Newsom. “Governor Newsom Announces Plan to Prevent Big Oil ‘Profit Spikes’ & Save Californians Money at the Pump | Governor of California.” Governor of California, August 16, 2024. https://www.gov.ca.gov/2024/08/15/governor-newsom-announces-plan-to-prevent-big-oil-profit-spikes-save-californians-money-at-the-pump/.

[13] “California Energy Commission Gains Authority to Regulate Refinery Transportation-Fuel Inventories | Insights | Greenberg Traurig LLP,” n.d. https://www.gtlaw.com/en/insights/2024/10/california-energy-commission-gains-authority-to-regulate-refinery-transportation-fuel-inventories.

[14] Governor Gavin Newsom, “Governor Newsom Announces Plan to Prevent Big Oil ‘Profit Spikes’ & Save Californians Money at the Pump | Governor of California.”

[15] California Legislative Information, “Bill Text - ABX2-1 Energy: Transportation Fuels: Inventories: Turnaround and Maintenance.,” October 14, 2024, https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320242AB1.

[16] American Fuel & Petrochemical Manufacturers. “Why California’s Refinery Inventory Mandate Is a Bad Idea,” August 28, 2024. https://afpm.org/newsroom/blog/why-californias-refinery-inventory-mandate-bad-idea.