Jeff Mower:
Hello, and welcome to the Platts Oil Markets podcast by S&P Global Commodity Insights. Today we will be discussing legislation being proposed in California to battle high gasoline prices and what is driving those prices. I’m Jeff Mower, director of Americas oil news. And joining me today is senior refined products editor Janet McGurty, Platts refined products price editor Zoe Vastakis, and analyst Matthew Gordon.
California gasoline prices are notoriously volatile and have been for some time. The state’s CARBOB blend regularly commands a price premium to other gasoline grades in the US and is susceptible to wild price swings during refinery outages, as refining capacity has tightened over the years. For instance, Los Angeles CARBOB is currently averaging around 34 cents a gallon above NYMEX RBOB, the futures contract. And that’s up from around 10 cents under NYMEX RBOB in July, according to Platts data. These high prices have naturally caught the attention of California’s lawmakers, where the Senate is considering a bill proposed by Governor Newsom to require refiners to boost gasoline reserves.
Janet, you’ve been covering these developments. How about explaining the proposal that was recently passed by California’s Assembly? How does the assembly think that this will solve the high gasoline prices in California?
Janet McGurty:
Well, so the bill is called ABX2-1 and it is based on the premise that Californians deserve a strategic transition away from petroleum transportation fuels. And as California has been the leader in cleaner fuels because CARBOB, the fuel that is used in California is more expensive to make because it is a cleaner burning fuel than gasoline made in other parts of the country and used in other parts of the country. And this adds about 11% to the cost of the fuel itself, which is part of the reason why it’s more expensive.
So California Energy Commission set up the Department of Petroleum Market Oversight at the urging of Governor Gavin Newsom. Tai Milder, who is the head of the new Department of Petroleum Market Oversight has been the push behind this. And it’s about price spikes when refineries go down for work, planned or unplanned, so that’s what they’re trying to mitigate here is the price spikes because California makes its gasoline, which is specialized and it’s not really made anyplace else. So they can’t bring it in from other places, it’s difficult. So when there is a refinery outage, prices go up. Part of the problem is that California’s lost about 200,000 barrels per day of refining capacity over the last 10 years, due in part to their push to cleaner fuels. So we have the CARBOB, and then we also have the low carbon fuel standard, which is really the model for anyone in the world who wants to develop a low carbon fuel standard credit program, and it’s been very successful, but it does add value and cost to the price of gasoline that consumers pay.
So what Tai Milder says, he’s again the head of the DCPMO, is that, “How do we smooth out these transitions?” So they did a huge study and it was really interesting. They really looked, it was very comprehensive. But he came up with the idea that the whole point was that we have less refineries and that’s part of his thing. And part of the reason to have less refineries is because they’re pushing, at the forefront, are pushing towards cleaner fuels, so less refining capacity. So to smooth that out, what he has come up with in this bill, ABX2-1, which passed the Assembly and is now headed to the Senate for a vote this Friday, and it is expected to pass handily, is: How do we smooth this out?
So he came up with the upshot of the studies done by California’s Energy Commission is we need to have more refined products in supply stocked. Our stocks need to be higher, so part of the new bill is to develop an amount of inventory that each refiner has to hold.
Jeff Mower:
Have they said how much? Have they specified how much storage?
Janet McGurty:
No.
Jeff Mower:
So they haven’t really specified that.
Janet McGurty:
No, they haven’t. They said 15 days. Okay, that’s kind of what they’re thinking. I mean, I think they use 78 million gallons per day of gasoline there, so it’s a lot of that. And that’s not there. They don’t have that.
Jeff Mower:
Yeah. It’s interesting when you brought up the shrinkage of the refining in California. I was looking at it earlier today, at the EIA data, and there was 42 refineries in 1984. Now we’re down to 14 now.
Janet McGurty:
Right.
Jeff Mower:
So over that time, capacity has shrunk, even over a longer period of time, from 2.5 million barrels a day to 1.7. And I thought it would be interesting, I looked at Texas. Texas, over the same period, climbed from 4.4 million barrels a day to 6.3, even though the number of refineries shrank, so you’re expanding refinery operations there. But one question I had, get back to the legislation, but one thing I thought was interesting was on the Atlantic coast, we also saw a shrinkage.
Janet McGurty:
We did.
Jeff Mower:
Of refining capacity.
Janet McGurty:
In 2011 and 2012, we had a huge shrinkage.
Jeff Mower:
But we don’t see that level of price volatility because, as you mentioned, because of the CARBOB, the CARBOB specification.
Janet McGurty:
That’s it right there. But the things is too, so they lost all the refineries, so because it’s been the legislation that’s been passed in California that’s discouraged refining. Refiners like Valero have said, actually, they said in their last earnings, but also, I read their 10-Q that they’re thinking about options for their two California refineries, depending on what happens. So again, Valero is the second-largest independent refiner in the US. It’s a very, very structured, well-run company, and very financially conservative, so I mean that could harken for more refining closures. Right?
Jeff Mower:
Yeah. So I imagine they’re pushing back, the refiners are pushing back on this.
Janet McGurty:
No one’s really come out and said anything. So I did ask for a comment from Chevron because Chevron, as you know, left Chevron aka Standard Oil of California, left, moved their headquarters from San Ramon outside of San Francisco to Houston just recently. And they say that’s not the reason, just that more people are down there. And that’s makes sense, I mean, you do get it. But when I asked them about it, they were like, “Well, look, we don’t work really with the department, the new department of oversight, but we do work a lot with the California Energy Commission. We’re still in discussions and nothing has been finalized.” So none of the refiners have been given an absolute number, but again, it’s 15 days. That’s what’s recommended by the CEC report.
Jeff Mower:
Yeah. And speaking of the California Energy Commission, there is a part of the plan to have them, correct me if I’m wrong, to have them kind of regulate or control the refinery maintenance.
Janet McGurty:
Yes. So that’s kind of a really hot button item right there because, well, first of all, both refiners, everyone wants a safe refinery. No one wants anyone to be injured or killed in a refinery. But there’s different understanding of how that happens. And so but the Western States Petroleum Association, which is the industry group for California refineries and other union groups who have unions, who operate in the refineries, they’re like, “You don’t quite understand the intricacies of what happens. We try to do it as best we can. We have procedures in place. We have turnaround schedules that we … ” It’s a very structured operation, a turnaround in a refinery. And so we don’t just do it willy-nilly. We plan for it and everything. But now, apparently, the CEC and the Department of Petroleum Market Oversight have to get approval from those two entities before they can do any planned work. They have to run it by them.
So part of the refiners were saying, “Hey, but that’s kind of confidential information, trade information.” And so but they have put in there, the state has said that it will be treated as confidential. So apparently, it won’t be released to the public.
Jeff Mower:
Interesting. Yeah.
Janet McGurty:
So that is kind of interesting.
Jeff Mower:
Oh, sure. So Zoe, what’s been happening with California gasoline prices lately? I mean, they’re still, as I mentioned at the beginning, still elevated. And just for our listeners, we’re talking about stock prices here. I’m not talking about retail. You get to retail level, that’s a whole other thing. What’s been going on with California prices lately? And how is that comparing with other regions in the US?
Zoe Vastakis:
Right. Well, it’s kind of like what you were saying before, over in Los Angeles, prices have been relatively stable, bouncing around 35 cents per gallon against the NYMEX. In San Francisco, though, we’ve seen a slight decline since the end of September. And we’re sitting around 30 cents per gallon. It’s probably shed around 10 cents over the last week or so. But what’s interesting is that in mid-September, we did see differential prices in both San Francisco and Los Angeles reach one-year highs. It was in the second week of September, specifically on the 11th. That was when San Francisco closed at 108 cents against the NYMEX, and LA was at 52. And so that ended up corresponding with a lot of different refinery problems that were going on at the time, specifically with PBF Energies flaring at their Torrance refinery. I believe that also happened around the 11th, 12th, around that time.
So you’ll see there that when we do have refinery flarings or complications in the West Cost, the pricing can be very sensitive to it. And it’s the same thing over in the Midwest as well. The Midwest, specifically Chicago, is very reactive when it comes to different refinery flarings. Presently, we have Chicago’s CBOB at 1.75 cents above the NYMEX futures contract and RBOB is at 6.75. But we saw on September 26th that prices for CBOB, they spiked to an almost two-year high when they reached 30 cents per gallon above the NYMEX, and RBOB closed at a two-month high of 40 cents per gallon. And this ended up coinciding with a couple different things going on, like the flaring at Lamont with CITGO. And BP’s also having their plan turn around as they transition from summer grade to winter grade.
That’s also something that’s important to touch on is the fact that we’re currently in transition period of all of the grades, so that has to do with the fact that the Reid Vapor Pressure, which has to do with the gasoline’s capability of evaporating once it reaches the engine, those are all now increasing in terms of temperature, which will make the pricing decrease. And then we can circle back to West Coast, that presently has a Reid Vapor Pressure of 5.99, which is the lowest RVP across the nation. You will not find anything that low anywhere else. And it has to do with all the different products that are blended into it to make it so clean.
Jeff Mower:
To get that low RVP.
Zoe Vastakis:
Exactly.
Jeff Mower:
That’s just it. You need more alkylate, I imagine.
Zoe Vastakis:
Yeah.
Jeff Mower:
Right. To blend and to reach that low RVP.
Zoe Vastakis:
Exactly, among other products as well.
Jeff Mower:
That really does help explain the CARBOB premium there. And I guess I know you covered the inventories in California too. And it seems like just storage capacity seems to be thinner in California than it is in the Midwest.
Zoe Vastakis:
Yeah. I don’t know necessarily if that’s the case because if you think about it, both the West Coast and the Midwest are almost like their own little isolated areas, more so West Coast than the Midwest because Chicago is connected through the Buckeye Complex to the Atlantic Coast. And then I think they have the capability of shipping colonial product up there as well, which connects the Gulf Coast and the Atlantic coast as well. But for the most part, the West Coast is completely independent from any other region of gasoline. You won’t really hear about transportation going through except for maybe from the Pacific Northwest moving down. Or Canada sometimes, where they’ll import product down to California.
But in regards to storage capacities, I will say it also just does depend on seasonality and each complex is completely different in regards to whether or not they can move multiple products at the same time in the system that they have, in regards to pipelines and transporting different types of product.
Jeff Mower:
All right. So Matthew, where do you see … We were talking about California’s refining capacity, how it shrunk over the years. Where do you see that going down the road? With the energy transition, everyone’s dealing with this transition right now. What’s the expectation there?
Matthew Gordon:
Sure. So we did see, and as Janet mentioned, the closures of two major refineries in the last few years. So Marathon Martinez and Phillips 66’s Rodeo, they actually both converted to renewable diesel production. And then we’ve seen a pause in the past few years of any … We haven’t had any new announcements of closures in California. That’s really because of really strong refining margins globally. And the fact that gasoline production in the state has declined more than gasoline demand, which rebounded post-pandemic. While we saw refinery closures before the pandemic, there was not a huge change in refining capacity in the state. This was a big drop in the past few years, and while it was associated with the demand destruction from pandemic lockdowns, it really was inevitable with the state’s policies that are aimed towards moving the state away from fossil fuels.
And so looking ahead, we really expect this trend to continue. California refineries are going to be pressured by, in the near term, weak diesel cracks. And then in the long-term, weaker gasoline cracks as electric vehicles displace and account for most of the on-road fleet as we get into the 2030s and the 2040s.
Jeff Mower:
Now do you think in the meantime, is California going to be more reliant on imported fuels? Well, I guess during the transition, it’s going to be tough, as you said, when you get way out to the 2030s and beyond, you’re going to see a reduction in gasoline demand, so you simply wouldn’t need as much. But I guess in the shorter to medium term, what do you think?
Matthew Gordon:
Right. And we are in this transition where we’ve had this refinery conversion to renewable diesel production, but gasoline demand is only at the beginning of what we are expecting to be a long-term decline from electrification of light duty vehicles. And so we’ve actually already seen California and the West Coast in general relying more on imports this year. So imports were near five-year highs through the first half of 2024. And we’re actually expecting imports to be even higher in 2025 because of the renewable diesel issue.
And I actually wanted to talk about there’s a twofold impact of refineries being converted to renewable diesel. So not only is that refinery capacity that used to produce gasoline being lost in California, but we’re also expecting renewable diesel to continue to pressure diesel cracks in the West Coast because of this over supply of diesel fuel. And eventually, that’s going to lead to economic run cuts and potentially even further rationalization of refining assets, which then makes the gasoline deficit an even bigger issue.
So yes, California is relying increasingly on imports, and not just gasoline. That’s also going to be true for jet fuel. We’ve seen refiners maximizing jet yields in California. And we’re likely going to reach a limit on how much diesel yield can actually be shifted to jet fuel. And that state is going to rely more and more on jet imports from Asia.
Matthew Gordon:
Another thing on California’s reliance on imported fuels, and Janet was comparing the West Coast to the East Coast in terms of their gasoline specifications. But it’s also what Zoe said about California being a pretty isolated market. There just isn’t a lot of pipeline infrastructure to transfer refined products from the Gulf Coast or the Rocky Mountain region into California, so that’s where a lot of that reliance on imports is coming from. And any further rationalization of capacity, if that outpaces demand loss, that reliance on imports is only going to grow.
Jeff Mower:
That’s a very good point. Are there capacity constraints, are their import capacity restraints in California for gasoline?
Matthew Gordon:
I think something important moving forward, we’re expecting the majority of California and West Coast refining capacity to either need to shut down or convert to biofuels production by the 2040s. And at the same time, jet fuel demand is still expected to grow, so jet fuel imports are going to have to increase to supply the California market. And what’s going to be important is for, especially those coastal refineries that are rationalizing, to maintain their storage and other infrastructure to be able to continue importing even when the refinery and their crude distillation is shut down.
So a lot of refineries on the coast are going to need to convert to terminals. One example is the Alliance refinery shut down, but is still maintaining their storage tanks and pipeline infrastructure. So that’s going to be important mostly for the jet fuel market because the majority of jet fuel supply in the long-term is going to come from imports. And a lot of that could be sustainable aviation fuel. It probably will be. But it’s still going to need to be imported into California.
Jeff Mower:
So what do you think about this sort of plan to dictate or having the state have a bigger role in sort of controlling the refinery maintenance programs or building out this storage infrastructure? Does it make sense to build out the storage infrastructure if they’re going to be phasing out the fuel?
Janet McGurty:
So one of the parts of this, because this was a very contentious issue, they cannot add more storage capacity to do this.
Jeff Mower:
Why not?
Janet McGurty:
Because it’s inefficient and they’re trying to move away from, so it’s kind of a catch-22. Right?
Jeff Mower:
Sure.
Janet McGurty:
They want to increase it, they want to increase storage, but part of the problem is that then they’re going to have to build more storage capacity, but they’re trying to move away from fossil fuels. And this is what the Western States Petroleum Association brought out. So you don’t seem to understand the intricacies that they told the legislatures about what exactly happens. So that’s why there’s a lot of contention about: Will this work or won’t it work? Because that’s part of the deal, but they don’t want to pay for any more storage infrastructure. And let’s face it, the refineries that we’re looking at, they’re all city refineries, and as we know, refineries that are in the city really don’t have a lot of room to expand to add more tanks or to convert tanks to gasoline and whatever. So that’s part of the issue that people are questioning is: How is that going to work right there?
Jeff Mower:
Yeah. The western states … Is that alliance, are they arguing that this is more of a political move? The California attorney general settled with three trading firms that they claimed were collaborating to boost gasoline prices.
Janet McGurty:
Correct.
Jeff Mower:
This followed that Torrance refinery explosion in 2015, so Vitol and South Korea’s SK Trading I think two divisions of SK were … Or they agreed to pay 50 million in penalties for … But I don’t know all the details of the case.
Janet McGurty:
Yeah. I remember writing that up. So as you know, they have been … Rob Bonta, who is the attorney general, he filed a case. In the past, he’s filed against the oil refiners. He’s filed against I think ExxonMobil for plastics. Right? So they’re really having this clean energy in their sights, so this is the way moving forward. Now what the Western states is saying is that you’re moving too quickly. You’re not thinking about the implications of this. We need California. California’s always been at the forefront of clean energy and trying to move us forward to clean energy. And people understand that is what they do. And it’s not a bad thing because we always need someone who’s going to be pushing the envelope a little bit further.
But what they’re saying is that this is really not reasonable. Let’s stop and think about it. So the CARB system, why I think it’s so good and I’m not alone in this, is that it’s really well-thought-out. And it evolved over time and it’s a very, very solid program. So that’s kind of what the industry is looking for from this as well. Okay, we understand what you’re trying to do and we understand the transition, but let’s work together on it. And I don’t think the industry feels that they have had enough input to it.
Jeff Mower:
All right, well, how about this? We’re running out of time here. How about just sort of a final question for everyone here? What are you looking out for in the near term? Any indicators or anything you think is being overlooked here that our listeners should be aware of?
Matthew Gordon:
I think one of the most important factors looking ahead, especially in the next couple years, is what is going to happen to renewable diesel production in the state of California because a lot of the deficit that we’re expecting to develop around gasoline and jet fuel is a result of renewable diesel and this diesel surplus pressuring refining margins in California. So we’ve seen this year low carbon fuel standard credits have been at an all time low, RINs have been very weak. So we do expect some continued growth in renewable diesel supply in California. Some of that is going to come from imports. And then some of the capacity still has time to ramp up to full production, but if the incentives are not there and renewable diesel plants start to operate at lower utilization rates, or if we even see some plants or refinery conversions shut down, it’s actually going to loosen the gasoline market because it’s going to encourage refiners to operate at higher utilization rates. It’s going to improve diesel cracks.
Jeff Mower:
Janet, what do you think?
Janet McGurty:
So piggybacking on what you said, Matthew, about renewables, so in November, the LCFS is meeting because they’re addressing the fact that the carbon credits have dropped so low that it has kind of stalled the renewable diesel movement. And they would like to push that forward, so they’re looking at new pathways for different kinds of feedstocks and to bolster and to bring the LCFS back up. So one of the things that was brought up in the hearing though on the gasoline, which ties into this, was the fact that what this bill is trying to do is to save consumers about 6 to 7 cents per gallon at the pump over the spike thing.
However, when the LCFS bill is revamped, that is expected to add 45 cents per gallon to the cost of consumer gasoline prices. So the LCFS is expected to increase renewable diesel, so I think once they come up with their actual mandate, what they come up with, I think you’re absolutely right. You’ll see less gasoline production and more renewable diesel will be kick started again because the credits will be more valuable. And so that again, puts California’s gasoline supply throughout this transition more at risk. And that was one of the things that one of the legislators brought up at the hearing at the Assembly last week.
Jeff Mower:
All right. And Zoe, how about you?
Zoe Vastakis:
So I do agree with everything that was being said about the transition to the renewable diesel and how that will then start to cut the gasoline production, which would then lead to potentially a spike in prices to make up for that lack of production. And we are presently seeing statewide production slightly increasing in California after closing at about 18-month lows in mid-September, which aligned with quite a few different refinery flarings that were going on at the time. So we are seeing that the production is starting to recover, primarily due to activity in Southern California, which is essentially the Los Angeles area. But with that transition over, we will again see the decline, and then we’ll see the increase in prices, so it all really just depends on how much capacity we will still have dedicated to gasoline.
Jeff Mower:
All right. Well, thanks, Zoe. And thank you Janet and Matthew for joining me. And thanks again to our listeners for tuning into this episode of the Platts Oil Markets podcast. This Oil Markets episode was produced by Jennifer Pedrick in Houston.