Benicia Blues: Valero’s Shutdown Signals Trouble for California Gas

On Tuesday, April 15th, Valero Energy submitted notice to the California Energy Commission of its intent to idle, restructure, or cease refining operations at Valero’s Benicia Refinery by the end of April 2026. In addition to the notice regarding Benicia, Valero filed a form 8-K with the U.S. Securities and Exchange Commission stating that it “continues to evaluate strategic alternatives for its remaining operations in California.” Given that Valero also operates a refinery in Wilmington, California, closure of that refinery may be one of the alternatives under consideration. 

If Valero idles Benicia, it will become the fourth refinery to cease supplying gasoline to the California market since 2019, leaving only eight refineries (just two-thirds of pre-2019 capacity) to supply the state. Two former petroleum refineries – Marathon Martinez and Phillips 66 Rodeo – have been converted to renewable diesel and sustainable aviation fuel production, and Phillips 66 Wilmington is scheduled to shut down in 2025. A Benicia shutdown would leave the Bay Area with only two operating refineries. 

So What? 

A closure of the Benicia refinery will have sweeping impacts: Benicia’s refinery produces about 9% of California’s gasoline and employs roughly 400 workers, In addition, the facility uses contractors and service providers to support its operations, making it a cornerstone of both the local economy and the state’s fuel supply. The loss of this facility means significant revenue loss for the city, hundreds of jobs at risk, and a potential increase in fuel prices for consumers statewide. These impacts will compound the effects of converting the Martinez and Rodeo refineries into smaller scale renewable fuel operations over the past few years. 

The more widespread impact will be on California (and PADD 5) transportation fuel supply, especially for gasoline.[1] Combined with the planned shutdown later this year of the Phillips 66 Wilmington refinery, about 17% of the state’s gasoline production could disappear over a short period. While we anticipate gasoline demand in the state will decline – due to increasing fuel economy and a growing electric vehicle (EV) population – the step-loss in supply associated with a Benicia closure would create significant near-term disruption. We expect to see higher gasoline prices in the state and challenges in supplying gasoline if Benicia is idled.  

Implications for California Transportation Fuels  

PADD 5 (which includes California) is isolated from other refining centers by distance and lack of inter-PADD infrastructure.[2] As such, the region has a history of self-sufficiency in supply of refined products. The future implications of declining fuel production in California include: 

• Gasoline: Imports will increase and probably become ratable as the need for imports will be structural rather than event-based in the next few years. 

• Diesel: The lost production of diesel fuel will have minor impacts as renewable diesel and biodiesel has displaced some 70+% of the petroleum diesel resulting in significant exports of petroleum diesel from California. 

• Jet Fuel: Currently, approximately 10% of California’s jet fuel is imported; with the shutdowns, imports will increase. 

Historical Context of California’s Refining Landscape 

California has historically been a challenging environment for operating a refinery. The state has unique fuel specifications, tough environmental standards, and difficult permitting rules. Furthermore, community sentiment tends to be at odds with fossil fuel operations. Even so, margins in California have been mostly positive. In the past decade, however, the costs to operate a refinery and supply petroleum-based fuels have risen with the implementation of two greenhouse gas (GHG) reduction regulations (Cap-and-Trade and the Low Carbon Fuel Standard). Furthermore, the outlook for gasoline demand is dim as the state pushes to eliminate the sale of new internal combustion engine vehicles. Most recently, new refinery mandatory inventory levels, planned maintenance requirements and margin caps[3] have further dimmed the joy for refiners in the state. 

During the past two decades, major companies have decided to pull up refinery stakes because of the changing operating environment, but those refinery sales did not reduce refinery capacity in aggregate. (Exxon sold the Benicia refinery to Valero; BP sold its Carson refinery to Tesoro; Shell sold its Wilmington refinery to Tesoro and its Martinez refinery to PBF; ExxonMobil sold its Torrance refinery to PBF).  

Who will Fill the Void? 

The aforementioned shutdowns and conversions are occurring before the associated gasoline displacement has been realized via EV adoption or sufficient fuel efficiency improvements. Which begs the question: where will the backfill of gasoline supply come from? In 2023 and 2024, California imported 36 thousand barrels per day (kbd) and 49 kbd of gasoline (representing 4.5% and 6.2% of supply), respectively, primarily as components that are blended to CARBOB in a refinery to supplement refinery production. Only a fraction of these imports was CARBOB, reflecting the fact that refineries outside California are challenged to meet the state’s unique gasoline specifications. About 75% of these imports came from India, South Korea, Taiwan, and China. Less than 0.5 kbd came from the U.S. Gulf Coast (USGC); those volumes are disadvantaged due to the cost and scarcity of U.S. flag tonnage compared to foreign flag vessels. The distant refining centers with voyage times of three or more weeks will likely become the primary source of imports, provided those refineries prepare to produce the California-spec CARBOB. The USGC could also serve as a source of product if prices in California rise enough to support the U.S. flag shipping costs.  

Historically, California’s supply of gasoline had a high level of volume volatility with some periods of no imports (ex-PADD 5 movements) as the need for out-of-PADD supply has depended upon the performance of the in-state refineries (with maintenance and unscheduled outages driving shortages and requiring periodic imports). With the anticipated structural shortfall in California gasoline supply, we expect companies may dedicate resources outside PADD 5 to produce and transport product to California. Some may even choose to enter California’s retail market once the ratable supply lines are established. 

In any event, if refinery shutdowns outpace a reduction in gasoline demand, the gasoline prices in California that were $1.22 per gallon above the U.S. average in 2024 will climb even higher as the costs of supplying the fuel from distant places will set the price.  

Broader Implications 

• Logistics: Increased imports by tanker will require capacity to receive additional cargoes of fuel; this will test and strain the ports and infrastructure in California likely creating a bottleneck for supply.[4] 

• Market Landscape: Fewer refineries mean less competition and potentially greater price volatility, but requiring a ratable supply from outside California could open the door for suppliers without PADD 5 refineries to enter the market. 

• GHG Inventory: The closures will represent a large decrease in California’s in-state GHG inventory. In 2023, refineries and hydrogen plants comprised one-third of the stationary GHG inventory and nearly 10% of the state’s total reported GHG emissions.  

• Real Estate: The refineries in question represent properties covering hundreds of acres in industrial areas bordering residential properties. They could be very attractive for light industrial, warehousing, or residential use if cleaned up to the relevant standards. 

• Regulatory and Political Debate: The stakes will be heightened as critics argue California’s policies are detrimental to the state’s economy while proponents of these policies highlight environmental and social benefits of the policies. With job and economic losses, the potential for higher gasoline prices, market volatility, and potential fuel availability issues, this debate will only get louder. 

• Regional Strain: A reduction in California gasoline production will have knock-on effects in Arizona, Nevada, Washington and Oregon because California supplies much of the transportation fuel to Arizona and Nevada, and interchanges fuel with the Pacific Northwest by marine movements. 

Conclusion 

Valero’s decision to potentially shutter the Benicia refinery is a watershed moment for California’s energy market. It underscores the tension between environmental ambitions and fuel supply security, with far-reaching consequences for consumers, industry, and the state’s economic future. 

Stillwater Associates has unparallelled experience in the California and PADD 5 transportation fuel markets with particular expertise around fuels supply and logistics. The EIA West Coast Transportation Fuels Markets report and California Marine Petroleum Infrastructure study for the CEC are just two examples of the expertise that Stillwater provides to help stakeholders navigate the future with expertise in logistics, regulatory compliance, and market strategy. Contact us to learn more about how we can help you navigate this transition resiliently.