California Refineries Close as Gasoline Demand Slips into Permanent Decline

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California’s refinery sector is contracting, and the reasons are not as complicated as operators often suggest. When refinery owners announce closures, they usually point to the burden of environmental regulations, the costs of compliance, or fines from state agencies. Those factors are real, but they are not decisive. The more fundamental driver is demand. Gasoline consumption in California has been declining for nearly a decade. That trend alone reshapes the economics of refining, eroding margins and making long-term reinvestment in facilities unappealing. The closures we are seeing now are less about regulators pushing firms out and more about the market pulling the floor out from under them.

Two major refineries in California have announced plans to close, and together they account for a significant share of the state’s gasoline supply. Phillips 66’s Wilmington refinery in Los Angeles, with a capacity of about 139,000 barrels per day, and Valero’s Benicia refinery in the Bay Area, with about 145,000 barrels per day of capacity, are both slated to wind down operations in the next two years. Refineries typically produce about 45% to 50% of their output as gasoline, which means these two facilities together provide in the range of 2 billion gallons annually. With California’s total gasoline consumption at about 13.4 billion gallons in 2024, the closures represent roughly 15% of the state’s gasoline supply, a reduction that will be felt immediately in a tightly balanced market.

Governor Newsom and California lawmakers are not simply watching refineries shut down without response. The state government has opened discussions with operators and potential buyers in an effort to keep facilities like Valero’s Benicia refinery running, and has even floated the possibility of financial or regulatory concessions to delay closures. Legislators have considered bailout mechanisms and incentives to preserve local jobs, stabilize fuel supplies, and protect tax revenues that communities depend on. These interventions are framed as a way to manage volatility in the short term, but they also reveal the political difficulty of balancing an energy transition with the economic realities of towns and workers tied to the refining industry.

Gasoline consumption in California peaked around the middle of the last decade. In 2015, sales were just over 15 billion gallons. By 2024, that number had dropped to about 13.4 billion gallons. That is an 11% decline over less than ten years. The change has not been erratic. It has been steady, driven by more efficient internal combustion engines, greater adoption of hybrids, and the rapid increase in electric vehicle sales. The state has layered policy on top of those forces, with the Advanced Clean Cars II mandate requiring 100% zero-emission passenger car sales by 2035. That adds certainty to a trend that was already clear. With about a quarter of new car sales in California now electric, the replacement rate of gasoline-powered cars is tipping the balance. Every year, more of the fleet runs on electrons instead of gasoline, and every year the gasoline market shrinks a little further.

Diesel fuel tells a different story. Unlike gasoline, demand for diesel has held steady. In 2017 taxable diesel sales were about 3.1 billion gallons, and in 2024 the state reported 3.5 billion gallons. That represents stability rather than decline, and it reflects the stubborn nature of heavy-duty transport, freight, and agricultural sectors. Trucks, buses, and equipment still overwhelmingly run on diesel. California has made progress in introducing renewable diesel and biodiesel, which are displacing petroleum diesel in the fuel mix, as well as electrification of some buses and trucks, but the overall gallons sold have not dropped. That means refinery output is still supported on one side of the product slate, even as gasoline erodes on the other. The problem for refiners is that gasoline is the largest single product from most crude runs. Losing that anchor volume reduces the economic justification for keeping plants open, even if diesel remains in demand.

California’s gasoline demand is projected to continue falling sharply over the next decade as electric vehicle adoption accelerates and efficiency standards tighten. With the Advanced Clean Cars II mandate requiring 100% zero-emission vehicle sales by 2035 and EVs already making up roughly a quarter of new car purchases, and 7% annual internal combustion vehicle retirements, annual gasoline demand is likely to decline by around 40% or more by the mid-2030s. This trajectory means that by 2035 California could be burning fewer than 8 billion gallons per year, cutting deeply into the volumes that once supported its refining sector.

When companies claim regulations are forcing their hand, they are partly right and partly deflecting. Compliance costs and fines for emissions increase operating expenses. If the market for gasoline were stable or growing, refiners would absorb those costs as part of doing business. Instead, they face a market where volumes are falling year after year and the rate of decline is accelerating, which changes the calculation. The prospect of spending hundreds of millions on upgrades to keep a facility running is hard to justify when the main product is losing customers. In that environment, regulations become the excuse for closures that were inevitable anyway. The real story is demand destruction.

Refinery closures create supply risks, and California has a history of price volatility when plants go offline. Taking hundreds of thousands of barrels per day of capacity out of the system removes a significant share of gasoline supply. In a market that is already relatively isolated geographically, that can trigger short-term shortages and price spikes until imports or other refineries compensate. These supply shocks can feel like crises to consumers, but they are actually symptoms of transition. Disruptions are not failures of policy or planning. They are natural features of a system moving from one dominant technology to another. The same pattern has played out in other sectors when tipping points were reached. Coal plants shut down before renewable energy was fully scaled. Film camera factories started shuttering before digital photography was perfected. Typewriter factories were abandoned long before word processing was universal. Petroleum refining is now experiencing the same process.

The feedback loop is important to recognize. As refineries close and gasoline becomes more expensive or less convenient, electric vehicles become more attractive. Charging infrastructure is expanding, ownership costs for EVs are dropping, and policy supports are firm. Consumers weigh their options, and the balance tips toward electric. As more EVs are sold, the gasoline market contracts further, and the case for keeping refineries open gets weaker. Gas stations begin to close in parallel, maintenance shops lose customers for oil changes and exhaust repairs, and parts suppliers see declining demand. Insurance companies raise premiums on older ICE vehicles as risks rise and parts become harder to source. Each step reinforces the erosion of the internal combustion ecosystem.

California is ahead of most of the world in this respect. With aggressive mandates and strong EV adoption, the state is crossing thresholds earlier than others. Once 15% to 40% of new sales are electric, as California is experiencing now, the convenience of owning an ICE vehicle begins to erode. When 40% to 80% of new sales are electric, the unraveling of the gasoline and diesel support system accelerates. California’s refineries are closing in the midst of these tipping points. The closures are not anomalies or isolated missteps. They are signals of systemic change.

For policymakers, the temptation is to intervene, to slow closures or subsidize continued operation in the name of stability. That misses the larger point. The decline of gasoline demand is not reversible. Trying to hold back refinery closures delays the inevitable and misallocates public funds. The better use of resources is to scale the new system. California will need more electricity generation, stronger transmission, expanded charging infrastructure, and planning for workforce transitions in refining and fuel distribution. Those are the investments aligned with the trajectory of demand.

The state’s experience with diesel will be somewhat different, as the demand plateau is not yet a decline. But the long-term forces are similar. Zero emission trucks and buses are scaling, mandates are in place, and low-carbon fuels are taking larger shares of the remaining market. Diesel demand will eventually follow the same curve as gasoline, just on a longer time horizon. Refineries cannot sustain themselves on diesel alone when their economics rely on large gasoline volumes.

Hydrogen demand will also decline as these refineries close, removing a significant block of consumption from the state’s industrial profile, as well as about 800,000 tons of CO2e emissions per year related to its manufacturing. Valero’s Benicia facility and Phillips 66’s Wilmington plant together consume in the range of 100,000 to 130,000 tons of hydrogen annually, primarily produced from natural gas in on-site steam methane reformers. That is a meaningful fraction of California’s refinery hydrogen load, and when the facilities go dark the market for that hydrogen disappears with them. In my broader projection of hydrogen demand across sectors, refining remains the single largest consumer for the next decade, but closures like these accelerate the fall. As gasoline and diesel demand shrinks and refineries follow, the biggest current use case for hydrogen steadily erodes. The narrative of hydrogen as a growth fuel collides with the reality that its largest industrial market is contracting in lockstep with the decline of oil.

Both refineries refine heavy sour crude sourced from a variety of domestic and international producers including Canada. As I worked out a couple of years ago, they require much more hydrogen per barrel than refineries that process light, sweet crude, about 7.7 kg per barrel as opposed to 1.5 to 2 kg per barrel. As global gasoline and diesel demand contracts, the heavier crude will be first off the market because it’s more expensive to process. About 60% to 70% of California’s crude consumption in its 15 refineries is of heavy, sour crude, and it’s likely significant that two heavy, sour crude refineries are the ones that have announced closures.

California’s refinery closures are best understood as demand-driven, not regulation-driven. Supply shocks will come with them, but those are normal features of a disruptive transition. Reading the signals correctly is critical. What is happening in California now will happen in other regions as EV penetration deepens. The state is simply showing the rest of the world what the future of gasoline and diesel refining looks like once the tipping points of electrification are crossed.