California Enacts Expansive New Refinery Controls

In 2022, Californians faced the highest gasoline prices in state history. Legislators in Sacramento felt compelled to act, and in 2023 they created a first-of-its-kind Division of Petroleum Market Oversight within the CEC, an “oil watchdog” designed to monitor and investigate activity in the energy markets that could impact fuel prices in the state. In October 2024, they took another step with ABX2-1. This law is aimed at preventing oil supply in the state from dropping, which could spawn significant price hikes.  It does so by giving the CEC power to regulate two types of refinery activities that could reduce supply.

First, the CEC can impose prerequisites that oil refiners must meet before they undergo refinery maintenance. These conditions may include requiring the refiner to demonstrate that it “has made resupply plans or other arrangements sufficient to ensure that the loss of production during the turnaround or maintenance event does not adversely affect the California transportation fuels market.” In other words, if refiners want to schedule maintenance, they may first have to convince the CEC that doing so will not restrict supply or cause fuel prices to increase.

Second, the CEC can require refiners to “maintain minimum levels of inventories of refined transportation fuels meeting California specifications, including any feedstocks and blending components for those fuels.” Similarly, the intended effect of this requirement is to prevent refiners from running low on supply, the effect of which could be higher gasoline prices for Californians. Before promulgating minimum inventory requirements, the statute requires the CEC to consider several factors, including whether the imposition of such requirements would increase supply and reduce prices to a greater extent than would be the case absent such requirements.

Proponents of the new law such as Governor Newsom insist that the new law will yield “a more stable gasoline supply in California” and prevent the sort of price spikes that plagued the state in 2022. But reactions have not been unanimous. Certain lawmakers have argued that the bill imposes intolerably high operating costs on refineries, which could cause some to reduce their activities in the state — or even to leave it entirely. If this happens, some worry the unintended consequence of the new law could be even higher California gasoline prices.

Either way, refiners in California need to be aware of ABX2-1 and the CEC’s forthcoming implementing requirements. The statute imposes significant costs for noncompliance — between $100,000 and $1,000,000 per day for each day of noncompliance starting three days after a compliance notification by the CEC. Firms should thus prepare for the CEC to begin imposing regulations under the new law and adjust their planning and operations accordingly.