Transcription
California is changing its supply of gasoline from refineries that were local to overseas refineries. But do we have the infrastructure to handle all this? Our guest [music] today is Professor Severin Bournestein who will tell us his opinion and assessment of current situation with refineries shutting down [music] and California getting its gas supply from overseas. I'm Sama Kurami. Welcome to California Insider.
There is a couple of refineries that are shutting down and as a result of it we may have to import gasoline. Can you tell us what's what's happening?
So California has been ramping up its use of electric vehicles and it's also been ramping up its use of hybrid and more fuel efficient vehicles. And as that's happened uh we are using less gasoline. So we're down about 10% from the peak and we anticipate of course according to the plans for the state dropping much further.
Refineries are huge capital investments and when they think about making those capital investments and updating their their equipment they have to think out many years decades is this going to are we going to make enough money on this to pay off the investments. So, refineries are realizing that they're not going to if we continue down this road. And some of them are choosing to exit. And that's no surprise. Uh when California first started talking about moving to electric vehicles, uh we knew that this would happen. Unfortunately, I think that there hasn't been as much planning for it as I would have liked to have seen. Uh but as we phase out gasoline, we are going to lose refineries and we're starting to see that.
Now, one of the problems is that refineries are not tiny little uh bits. You either lose a whole refinery or not at all. So when you have these lumpy exits, you can go from being having too much gasoline to having too little gasoline. California typically has uh enough gasoline to almost supply its needs, although we do import all the time. Um, and to ship gasoline to Nevada and Arizona. What's happening now is as we uh phase out the use of gasoline, we're starting to see some of these refineries, particularly as they come to points where they have to make a decision about making a large uh capital investment and saying, "No, we we're we're not going to do that. we're going to exit instead. So, in the last year, we've lost uh we're we lost one in Southern California, a Philip 66 refinery, and we are in the process of losing one in Northern California, um a Valero refinery.
>> And you mentioned you wanted to see more planning. Where where do you think is uh planning lacking? What's the what's the situation?
So for the last few years, the California Energy Commission has been talking about having doing a uh study to map out how to uh how to have a smooth ramp down of gasoline consumption. That study hasn't come out yet and we're now seeing that it would have been good to have that study a year or two ago before these refineries uh uh talked about exiting. there has I I think this has really woken up everyone in the state uh to this risk and there's more work being done both within the California Energy Commission and by researchers uh Neil Mahoney at Stanford uh Neil Mahoney and Ryan Cummings have done some work uh that looking at well how short are we going to be when these refineries close what is needed to offset that with increased imports uh and so forth. So, the state is now moving on it and I think that the news is pretty good that we have a lot of the facilities needed to import gasoline. Uh the problem is not, by the way, getting the gasoline. There are plenty of places in the world that can make gasoline uh or make the blending components to make California gasoline and ship it to California.
The problem is once you get those ships that here and those are big ships, they're carrying 40 million gallons of gasoline. Uh so these are ships they have to have a place to dock. They have to have the port facilities, the pipelines to take them away, take the gasoline away from the port. And very importantly, they have to have the storage capacity because you're not going to have a continuous stream of tankers arriving. You're going to have a tanker arrive periodically to fill up fill this excess uh demand. And then you got to put it somewhere. You can't just have the uh the tanker sit there and gradually offload when we need it. The tanker has other things it has to do. So you have to have storage facilities and the work that's been done is identifying the [snorts] storage facilities that are out there and the storage facilities that could be created particularly as we use less crude oil because we don't have these refineries. Some of those crude oil storage facilities can be converted to gasoline storage facilities. So that's the sort of thinking that's going on. uh if we did absolutely nothing and didn't take any action, we could have a real problem. And there's been a study out of USC, I think, overstating the probability of that, but saying correctly that if nothing else changes, we could see big price spikes. But other things are going to change. [clears throat] And so the question is can we create the capacity to uh to uh be able to import either the finished gasoline or the blending components as needed to replace refineries.
>> Now how far are we from what we need the infrastructure we need to build is and how much infrastructure is it and how long does it take to build it?
>> I I can't give you a precise answer on that. the um there are the study out of Stanford suggests that we're not actually that far and that it's mostly converting uh infrastructure that you know if you think about it what we've been doing is taking crude oil and making it into gasoline. And now we if we if some of the refineries close, we'll be importing something that is further down the supply stream and is the gasoline. So there that means there's going to be infrastructure that we're not using. And refineries, although people often think of them as mostly the actual chemical process of turning oil into gasoline, they also have huge storage facilities and they have huge pipeline connections because they're bringing in crude oil and sending out gasoline. So, a lot of that can be converted to now support uh gasoline import industry to a greater extent. We already have some of this cuz California has always or for years and years, decades been an importer of gasoline. But to ramp up those imports substantially,
>> you mentioned that there are uh plenty of places that will sell us this kind of gasoline. When we talk to industry experts, they bring up that the California uh blend is a difficult blend to make and not many refineries across the globe can do it. What are your thoughts on that?
Well, it is a difficult blend to make. Um, there are uh there are not hundreds of refineries that can do it, but there are tens. But you don't need to import the gasoline. You need to import all the components of the gasoline. And as the studies that have been done both at the CEC and from Stanford suggest that that gives you a much bigger market. And those are refineries that right now are able to do it. If there is enough of a market, refineries are very good. In fact, the business side of a refinery is figuring out all the things inputs you need and all the outputs that you sell and changing what you sell. So whether it's producing more diesel and less gasoline or more jet fuel and less diesel, they're constantly optimizing. uh when I w I was chair of California's petroleum market advisory committee and I met with some of the uh traders who the commodity traders who are in this business and I had one of them walk me through so there's a refinery outage in California tell me how you respond to that and so he walked me through well you got to line up a refinery somewhere that can produce the gasoline and he told me about various refineries around the world. Uh sometimes you have to get space in the Panama Canal if you need a tanker to get through the canal. You need to get a tanker that can carry it. You need port space when it arrives. You need pipeline capacity and you need storage. And so these brokers are in the business. That that's what they do for a living. They figure out how do you move a commodity from point A to point B and all of the licenses you need and equipment you need and so forth. So markets respond um to these sorts of pressures. We what we have to do in California is make sure that they don't run into barriers in California such as you know uh constraints on having enough port capacity or um licenses that are needed to convert a crude oil storage facility to a gasoline storage facility. Those are the sorts of things I think it should be California's job to focus on. And if they can eliminate those barriers, the traders will respond to the financial incentive. And the financial incentive is simply California gasoline sells for more. Um, if you look at the LA, Los Angeles spot price of California specification gasoline, it typically runs 20 or 30 cents a gallon more than the price of uh, federal reformulated gasoline in New York or the price of conventional gasoline in the Gulf Coast. So, traders are in that business. They will respond to those financial incentives, but we have to make sure that there aren't barriers to bringing in that gasoline.
>> Do you think in this transition there will be spikes in the price of gasoline? We already probably about 50% higher than the national average.
>> Yes. I mean, I I think it will impact it at least some, and if we don't, if we screw it up, it could impact it quite a bit. But let me first address California's gasoline prices are much higher than the rest of the country. Most of that is higher taxes and environmental fees. So just round numbers, California gas prices are about a dollar and a half a gallon higher than the rest of the country. A little under a dollar of that is we have higher uh uh excise taxes on gasoline. We have a sales tax on gasoline. We have a cap and trade program for the CO2 emissions and we have a lowcarbon fuel standard that adds additional cost for compliance with that. Plus, it actually costs and the estimates in industry vary, but probably around 10 cents a gallon more to make California gasoline,
>> the special blend, right?
>> Yeah. But when you add all that together, that adds up to a little less than a dollar a gallon. The extra 50 cents is what I call the mystery gasoline searchcharge. It wasn't there prior to February of 2015. If you look at the 15 years from 2000 to 20 to the beginning of 2015, California gasoline prices were out of line with the rest of the country, but they were out of line by an amount that almost exactly equaled the higher taxes and fees. After 2015, there was a fire in Southern California at a Southern California refinery. Our prices went up relative to the rest of the country and they never came down again. So the extra 50 cents a gallon, at least that's the difference that it was in 2025 over the year is what I call the mystery gasoline searchcharge. And what's interesting about that is that is not showing up in the wholesale price of gasoline. that's showing up further downstream. And there are a lot of concerns about California markets being less competitive than the markets in other parts of the country. Just to give you a couple of indicators, California is far far more brand uh oriented in gasoline than the rest of the country. In the rest of the country, most gasoline is sold by off-brands, not the big Chevron Shell uh type companies are sold by uh QuickMart and Speedway and these companies that are not in the refining business. They're not in the oil business. They're just in the business of buying generic gasoline and reselling it. Those companies have a much much smaller market share in California. And that's an open question. Why is that? Is it that Californians really are more brand loyal than the rest of the country? Is it that we put up barriers to those companies selling? Um, I don't think we have a good answer for that. The one exception is the hyperarts, the Costos and Sam's Clubs and so forth. and they put and they sell gasoline as everyone who knows who shops for gasoline, they sell it a lot more cheaply, but they don't have that many stations. And so, yes, they put downward pressure on the other stations if there's a station close by a Costco, but they don't put much downward pressure on a station that's miles away. Uh so that mystery gasoline searchcharge that appeared in 2015 uh has been uh a real problem. In fact, by my calculation, since 2015, it has cost Californians over $65 billion. And it's costing Californians over $5 billion a year.
>> And that's not related to the cap and trade. Uh it's it's separate from it. is completely separate from any of the production side including the capp trade and the lowcarbon fuel standards.
>> So it's distribution but it's not at the gas station side.
>> Well, we're not sure. It's it's unlikely that it's actually gas stations making a lot of money. It's more likely in the distribution and marketing, but this is an area that the state after the one of their special sessions a couple years ago in the legislature set up a new division of the California Energy Commission called the uh petroleum market oversight division or something like that um that uh now is looking into this. So I think there is focus on it. It's not a problem. It's one of the more difficult problems I've ever seen in my career. I've spent 40 years studying competition issues from the airline industry, electricity, uh, gasoline, oil, and this is one of the more challenging ones to unpack. We really don't have a good answer at this point.
>> Now, in terms of shifting to imports, uh, you mentioned that price could go up. H is it going to be spikes in the price or is it going to be prices going up in the long run? Uh or is it going to be shortages? What what does it look like?
>> Okay, so first let's be clear. It's not going to be shortages. The shortages that people of a certain age, my age, remember occurred in the 70s. And it occurred in the 70s because we were regulating gas prices and we wouldn't let the price go up. And when you try to squash the price below the market clearing level, you get a shortage that people want more than suppliers are willing to sell. You don't remember gas lines from the 1993 Gulf War or from the post 2000 wars in Afghanistan and Iraq because although the price of oil went up, the price just flowed through to gasoline and markets worked. So we're not going to have gas lines. We could have price spikes and these would occur more at the wholesale level if we run into a situation where there's a shortage of gasoline and the that causes the price to go up and we saw that in the fall of 2023 and the fall of 2024. Um we saw uh prices jump quite a bit uh even without these refinery closures because it it happened at a time when refineries do what are called turnarounds where they take some or all of the refinery down off production to do maintenance. And during a time when a number of refineries were in turnaround, another refinery had a unforeseen outage and suddenly the price went way up. That is a risk still and it's probably more of a risk if we don't get ahead of it and have adequate inventories. And that's what part of why we need to have storage. As far as a sort of long run higher price, the price of gasoline in California is already being set by imports. The, you know, when you think about a commodity market, what drives that price is the cost of the last supply of the product. So, you know, Saudi Arabia can produce crude oil for $10 a barrel, but they don't sell it for that. The price of crude oil is determined by the last the cost of the last barrel. Likewise, the cost of our gasoline is the cost of the last gallon of gasoline. And that in California is typically an imported gallon. So, we're already seeing a price premium in part due to that. And I think that we might see a bit more. probably not uh an amount that people would really notice 10 cents maybe. Um so I don't think that that's the major risk. The bigger risk is if we don't have the resilience in terms of import capacity and storage capacity. Uh we could get into situations where you get some sort of a disruption to the market. maybe one of the remaining refineries goes offline and when that happens uh you now have a tight market and the price goes up and because it as we've all learned takes a month or more to bring it to find new supply and bring it in if you haven't already stored gasoline in California uh we could end up with a prolonged price spike and that's what happened in the fall of 2023 when we saw a very long uh price spike that was costing Californians an extra 50 cents or a dollar a gallon.
>> Now, professor, in terms of other products that these refineries make, asphalt and propane and other things, we're going to lose all of that. Are we going to import all of that as well? What are your thoughts on that?
>> No, actually, so um the the second biggest product is diesel. And California now right now has the opposite problem. We have way too much diesel. And the reason is typically you make a certain part of the output is diesel. Um and it has been refineries have been designed to match that uh demand. But California because of the lowcarbon fuel standard has converted more than half of its diesel consumption to biodiesel to renewable diesels uh that are not made from oil. That's left a lot of extra capacity. That capacity can be converted easily to produce the third most uh uh the third most important output which is jet fuel. Turns out diesel and jet fuel are very closely uh related in the petroleum engineering. I am not a petroleum engineer but I've learned that. Um and then there are things like asphalt and propane uh which uh are not really challenges to make out of uh California refineries and are much easier to move around. So I think you know we don't use a different specification of asphalt or propane. Um and I I have not heard anyone in the industry worrying about the supplies of those resources. Um the big concern is gasoline
>> and you brought up jet fuel and uh from what we have heard that uh a lot of the military bases in California are using jet fuel and this is another concern the level of national security concern here that if you're importing gasoline from other countries this might what are your thoughts on that?
Oh, I I think making this into a national security issue is a is a stretch. There are many states in the United States that have no refineries at all that import all of their finished product. Um there are, you know, we are we for decades were dependent on the rest of the world for most of our crude oil before the fracking revolution. I think that there is a world oil market. California is producing less crude oil, but the United States is now a net exporter of crude oil. So the United States is, if anything, more secure than the rest of the world. There are some regulations that get in the way of us efficiently moving oil and gasoline around the country that maybe we will finally address. The most well-known one is what's called the Jones Act. The Jones Act requires that anytime you move product by ship between two points in the United States, it has to be moved on a US ship with US crew. Problem is, we haven't been making oil tankers um in the United States for years. And as a result, we see these games where you put oil or you put gasoline on a ship, you sail it to some non US port, you then sail it to another US port, and you get around the Jones Act. I mean, and that's just dumb. I mean, we we are shooting oursel in the foot with a regulation that long time ago was intended to protect an industry that has largely gone away in the United States anyway. um and now is just causing disruptions in the efficient shipment of product. We do have a lot of production facilities for refined product in the United States. They're not in California. California is produ we have eight or nine refineries that can still make our gasoline, but we can get gasoline from the Gulf Coast. The problem is where the Jones Act makes that more expensive in many cases than getting it from elsewhere in the world. And that that's something every economist who studies this rolls their eyes and says, you know, why is why do we still have this? But it's it's like many of the farm subsidies. There are strong constituents who um are in politically sensitive areas who want to continue these rules that protect them and uh politicians have not been able to stand up to them.
Right now there are big shifts in the economy. Everything is changing and there is a lot of uncertainty. Even for economists it's hard to know whether inflation is going up, it's coming down. Is the economy getting better? Is it getting worse? That's why we've decided to start a new show to sit down with different economists, industry experts, and CEOs to find out what's happening in the economy, financial markets, the housing market, so that you can make better decisions for your financial future. I'm Sama Korami and this show will be called Market Insider. We have a number of interviews out and we're getting great reception. Make sure to check them out. There's a link below. We'll see you there.
Now, professor, you mentioned that the usage of gasoline is going down in California. You mentioned 10%. It's been over the last two decades, right? That's gone down by 10%.
>> Yeah, it's actually went up. It went down, then it went back up again about 10 years ago when the price of oil crashed and now in the last few years, it started down again.
How likely is it to continue and how fast do you think this would be?
>> Oh, I think that we are likely to continue. Electric vehicles market share is continuing to expand. Um, it's very hard to know how fast uh the Trump administration has done a lot to slow that uh and to um promote uh gasoline cars over electric vehicles. So we could continue with a gradual very gradual ramp up or it could go much more quickly. If you look at the rest of the world where they are more committed to getting off gasoline, we are seeing just dramatic expansion of electric vehicles whether China or Europe uh or um Asia more broadly. I we are seeing very rapid roll out of electric vehicles. There's a lot of benefits from electric vehicles, not just in putting out less uh greenhouse gases, but also less local pollution that causes health problems and um may you know less dependence on gas stations and being able to charge at home for many people. So, I think that we are going to continue to see a and owning a a hybrid plug-in electric myself, I can say driving on electric is just a lot more fun. Uh the cars have a lot more torque, a much better acceleration, they're quieter, and they need less maintenance. So, the big the big barrier has been cost, and the cost has been coming down. battery technology is getting better and they are getting very competitive and of course if you read the news at all you know that the Chinese electric vehicles are very very competitive they are less than half the cost of uh US electric vehicles. So, I think it very much is a question of how much bar how many barriers we're going to put up to the expansion of electric vehicles, but I think that it's likely uh to continue. Um and we will just have to wait and see the technological barriers, how fast we drive down uh battery tech battery costs, how fast we expand battery capacity so that we can drive a car four or 500 miles instead of two or 300 miles on a charge. Uh and those are the questions that nobody really knows the answer to. If you had asked me this question 10 years ago, I would have said, "Well, EVs are still very expensive relative to um conventional cars." And that's just not true anymore. They're they're more expensive, but they are they've come down quite a bit in cost.
>> What about the grid? Some experts have told us that the grid may not be able to handle if if we go all electric. What are your thoughts on that?
>> Well, they're right. if we do it in a really dumb way. So the thing people don't get seem to fully appreciate is 95 plus percent of the time we have plenty of capacity on the grid. It's just certain hours and certain days of the year where the grid get can get very constrained. What we need to do is make sure we have the incentives for people not to charge their vehicles during those hours. Vehicles are batteries, so they don't have to charge during those hours. Most of them don't. We need to give financial incentives, and most utilities now do give financial incentives to get people not to charge vehicles during uh the peak hours of the day. Uh and we need to make sure there are the facilities available to charge at other times. In the short run, I think this is not much of a problem. Uh we're we're making good progress on first of all it's not that much of a load on the grid yet. Um and we're making good progress on moving people to other hours. The longer run challenge is hard to really predict. So if you had this discussion in before the pandemic when most people went to work most days the discussion was well if we're going to have people charging when electricity is abundant that's likely to be in the middle of the day. So you can't have people people aren't their cars aren't at home in the middle of the day. we have to make sure they're charging stations where they work or where they park their car for uh the subway or whatever. Now that's less clear. Um there you know three years ago people are saying well that's all out out people are going to work from home from now on so they can charge at home and then that changed and now people are more people are back in the office. So trying to figure out how to uh configure the infrastructure so that it is available for charging at times and we don't have people charging when the grid is super constrained and super constrained in California right now means 4 to 900 p.m. in the summer. That's when we really start pushing the constraints of the grid and you shouldn't have to charge your car very often during that time that that period and I think uh it's not that hard to give people incentives to move off that period. There is a lot of research being done not just on giving people financial incentives but also giving letting people give their control of how when their car is charging to a third-party uh app or uh uh or company that can be responsive to the grid operator. So the grid operator contacts that company and says you know 7 o'clock tonight it's going to be a tough hour. could you make sure that none of your the cars you charge are um are charging at that time? And they generally have an agreement with the user that says, you know, we'll make sure your car is fully charged by tomorrow morning or by uh some time and then they can optimize that around the needs of the grid. So if we do it smart, I don't think this is a big problem. If we do it dumb and we don't give people incentives and people just plug in their car when they get home from the workday, yeah, we could have a real problem. Uh, but I think that's an area where we're making real excellent progress on finding ways around that.
>> Berkeley Professor Severin Bournstein, it was great to have you on California Insider.
>> Thank you for having me on.
>> Tell us what [music] you think. Do you agree with Professor Bournestein about the situation at the ports [music] and electrification of the states? You can always email us at siamakal.com or comment. [music] We read all of your emails and comments. I'm Sama Kurami. This is California Opinion. We'll see you next time.