California’s fuel market faces mounting challenges as new legislation comes into effect and refining margins remain under pressure, the U.S. Energy Information Administration (EIA) reported on Monday.

Why It Matters

California, the most populous U.S. state, consistently experiences some of the nation’s highest gasoline prices, creating a strained relationship between the state and oil companies. The state’s geographic isolation from key refining hubs on the Gulf Coast and Midwest exacerbates its challenges, requiring it to produce all its motor fuels locally or import them, primarily from Asia.

As local refineries contend with profitability challenges, the EIA highlighted that imported fuels are likely to play an increasingly significant role in California’s supply chain. This reliance on external sources underscores the fragility of the state’s energy market, particularly as it navigates a shift toward renewable energy and stricter regulatory oversight.

Legislative Context

In October, Governor Gavin Newsom signed ABX2-1, a law designed to mitigate fuel supply shortages. The legislation mandates that refiners maintain minimum fuel inventory levels and coordinate refinery maintenance schedules with labor and industry stakeholders. By granting state regulators greater control over refinery operations, the law aims to stabilize California’s fuel market while preventing disruptions.

Refinery Closures and Transitions

Shortly after the bill’s enactment, Phillips 66 announced plans to shut down its Los Angeles-area refinery by the fourth quarter of 2025, citing “market dynamics.” This move follows the company’s earlier conversion of its Rodeo refinery near San Francisco into a renewable diesel production facility, which no longer processes crude oil. Such transitions highlight the broader trend of refiners adapting to changing market conditions and environmental pressures.

Market Challenges

Weak refining margins are adding to the difficulties faced by California’s fuel producers. In September, the U.S. gasoline crack spread dropped to $11.73 per barrel, its lowest level since November 2023. Similarly, the diesel crack spread fell to $17.98 per barrel, marking its weakest point since July 2021. These reduced margins are making it increasingly difficult for refineries to sustain profitability, particularly in a state with stringent environmental and regulatory standards.

Outlook

The convergence of new regulations, refinery closures, and declining margins paints a challenging picture for California’s fuel market. As the state continues its push toward renewable energy and reduced emissions, imported fuels are expected to become an even more critical component of its energy landscape, reshaping supply chains and potentially driving further market adjustments.