California Refinery Shutdowns Trigger Fuel Supply Alarm in Arizona

By Jonathan Eberle |

California is set to lose a crucial portion of its oil refining capacity by the close of 2026, following Valero’s announcement to shut its Benicia refinery, the state’s second largest. This decision follows Phillips 66’s plans to close its Los Angeles facility. Together, these closures will slash about 17.4% of the state’s total refining output, which may impact gasoline prices and fuel availability in neighboring Arizona and Nevada.

The backdrop to these closures is a set of stringent regulations introduced by Governor Gavin Newsom. These new rules impose strict oversight on refinery operations, including limitations on maintenance timelines and requirements for increased inventory storage. Advocates assert these regulations are aimed at preventing “price manipulation.” However, industry leaders warn they are exacerbating shutdowns and threatening fuel stability throughout the Southwest.

California’s status as an “energy island” complicates matters. The federal Jones Act restricts the importation of refined fuel from other U.S. regions, as it mandates domestic shipping be conducted on U.S.-built and -crewed vessels. Unfortunately, the U.S. shipbuilding capacity lags significantly behind nations like China, leading to costly maritime transport. Consequently, California may increasingly rely on foreign tanker ships for fuel imports, a method that is both emissions-intensive and volatile.

Governor Newsom attributes California’s soaring gas prices to alleged refinery “price gouging,” despite a lack of evidence from his administration. This regulatory approach has invited bipartisan criticism, including a joint letter from Arizona Governor Katie Hobbs and Nevada Governor Joe Lombardo. They caution that the new refinery rules could lead to increased consumer costs across all three states. Chevron supports this concern, stating these regulations may raise the frequency and duration of fuel shortages while permanently inflating consumer prices.

With California refineries already operating at or near peak capacity, the risk of closure tightens supply margins significantly. The anticipated shutdowns will reduce daily refining capacity to 1.34 million barrels, falling short of the state’s consumption level of 1.8 million barrels per day. This translates to an annual shortfall exceeding 140 million barrels.

Complicating matters further, California’s specialized gasoline blend limits the number of out-of-state refiners capable of meeting demand, further constricting supply options. Recent turbulence in the market highlighted this vulnerability when the temporary shutdown of the Martinez refinery caused gas prices to spike across the region, affecting Arizona and Nevada profoundly.

As of now, California boasts the nation’s highest gas prices, averaging $4.86 per gallon. Experts caution that future supply shocks could exacerbate price volatility and introduce potential fuel shortages throughout the Southwest.