A hundred years ago, California produced a quarter of the world’s oil supply. Today is the industry’s potential undertaker, heralding a ban on gas-powered vehicle sales from 2035. Yet with its famously long drives, California is also second only to Texas in the states United in gas mileage. Reconciling today’s dependence with tomorrow’s ambitions poses a big problem for state refineries but also for the state itself.

When it comes to oil, California is like Ireland: an island divided north and south, though sunnier. Mountains enclose it to the east; in the absence of major pipelines crossing the Rockies, California imports more oil from Iraq than from the US Gulf Coast. The state is also internally disconnected, with two largely separate oil markets centered on the Bay Area and Los Angeles respectively. Northern refineries tend to produce more diesel; those in the south no more jet fuel. But both produce a lot of gasoline. Not just any gasoline, but state-required anti-smog grade.

After peaking at more than a million barrels a day in 2004, California’s gasoline demand has since fallen by about a quarter.

Likewise, since that peak, more than a third of California’s refineries have shut down. Naturally, they were the smallest; capacity has only dropped by 13%.

Strong demand coupled with relative isolation — read: less competition — would apparently make California a refiner’s dream. When the Torrance plant blew up in 2015, margins jumped for the state’s remaining refineries. But the calculations change when this fuel market is also determined to eradicate consumption. Even before California considered banning gas-powered vehicles, rising prices at the pump dampened demand for years, in part because of isolation, but also because of local taxes and levies. environmental (as well as a somewhat mysterious bounty identified by UC Berkeley’s Severin Borenstein).

The ban speeds things up, and even more. The Advanced Clean Cars II rule just approved by the California Air Resources Board, or CARB, targets zero-emission vehicles, or ZEVs — mostly pure electric — accounting for 35% of new vehicle sales in 2026, 68% in 2030 and 100% by 2035. This path is a little more ambitious than the modeling of the CARB plan to reduce greenhouse gas emissions published in May, but which already predicted a sharp drop in gasoline demand.

Three things about this graph. First, although ZEVs will represent 100% of new vehicle sales by 2035, the fleet as a whole is still 60% gasoline. Second, demand for gasoline is falling faster than the fleet of vehicles using it, as demand has been modeled as falling by 40% even without the new mandate. Third, even assuming a 64% drop in gasoline consumption by 2035, this would imply that demand would still be around 300,000 barrels per day.

For local refiners, this is what evisceration looks like. Assuming that gasoline costs half the yield of a barrel of oil and excluding exports, this level of demand implies current capacity utilization at only 33%. Even during the pandemic shutdowns, West Coast refinery utilization fell to just 63%. That was enough to force the shutdown of nearly a tenth of California’s capacity.

Refiners can change their production yields, but not much. Matt Kimmel, senior analyst at Wood Mackenzie, an energy consultancy, points out that current price signals are encouraging just that: “You have every reason in the world to produce more jets. [fuel] and diesel, but it’s still 50% gasoline,” referring to current production. Kimmel cites other limits to flexibility. California refineries lack the petrochemical capabilities of their Texas counterparts. State-level carbon pricing also makes it less economical to export gasoline displaced elsewhere, particularly because California refineries already ship more than half of their crude oil from overseas.

The most likely consequence would be the closure or conversion of some capacity to produce renewable diesel or sustainable aviation fuel. Existing government programs encourage the latter, and grants under the Inflation Reduction Act provide an additional incentive. However, electrification will compete with renewable diesel for the heavy trucking market. Aviation is more promising, but jet fuel accounts for less than a fifth of current refinery output on the West Coast, so it cannot entirely replace the business. Furthermore, only more sophisticated refineries could incorporate low-carbon fuel production without significant loss of overall capacity.

As big as this is a challenge for California’s refiners, it’s also a challenge for the state itself.

No refinery would operate at 33% utilization; fixed costs mean it would close long before. For those who still drive gas-powered vehicles — still half the fleet in 2037, according to May figures from CARB — it portends an unstable future. Reliance on imported gasoline would be costly, not least because, as CARB wrote in May, investment in port and fuel-handling facilities, as well as logistics, would be needed to make in the face of all the additional tanker traffic. This disruption would extend to other areas as a closed plant also does not produce jet fuel or diesel. There is also the question of who would even invest in things like new storage tanks at ports or, more exotically, carbon capture at refineries. When the demand line points down, large upfront costs are spread over ever-decreasing gallons of supply. This equation rarely emerges.

The big risk is disruption. This has already been illustrated with the California power grid. While renewables reduce the possibilities for profitable generation in conventional power plants, some end up shutting down rather than running less. Yet until California has, for example, built enough battery capacity to replace gas-fired peaking plants, it risks outages when solar power dims in the evening and demand is high – such as the shows the current heat wave. The heat wave is also a timely warning that California’s ban on the sale of gas-powered vehicles will be entirely moot unless it beefs up its network relatively quickly and, importantly, finds ways to distribute charging. vehicles throughout the day to avoid excessive demand (see this).

Like refiners, Sacramento faces some constraints on its own flexibility, but it has changed course at crucial times. Last Wednesday night’s network emergency arrived – usefully? — hours before an overwhelming vote in the state legislature to keep California’s last nuclear power plant open. The state has subsidized old gas-fired power plants to stay on standby and has even offered to subsidize inefficient backyard generators up to $2,000 per megawatt hour. Such measures, it must be said, are not too different from payments made in other countries to oil refineries just to stay open.

Yet it must also be said that the California heatwave, the latest example of extreme weather to hit the state, is a reminder that the rising costs of climate change demand decarbonization, and fast. This same speed, however, provides its own disruption, as the economy moves away from old energy systems faster than our physical dependence on them.

More writers at Bloomberg Opinion:

• Red America Should Love Green Power Money: Denning and Davies

• California winery cheats on climate change: Amanda Little

• Struggling to stay cool? So are the generators: David Fickling

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Heard on the Street section of the Wall Street Journal and a reporter for the Lex section of the Financial Times.

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