Long time readers may recall the many articles we wrote over many years highlighting the madness of California planners and policymakers. We were born and raised in the land of fruits and nuts and lived and worked there for over four decades.
About four years ago, we made our California exodus. At the time, we thought our coverage of the Golden State’s self-destruction would continue. We still have family and friends there who we visit from time to time. But, as we’ve found, without a front row seat to the big show we’re less inclined to gawk at the insanity. Articles on California have diminished to a slow trickle.
Today, however, following a recent conversation with a friend and California resident, we aim our sights at our former home state. Once again, California delivers a rich example of what happens when central planning outweighs economic reality. Here the specific example involves extreme intervention in oil and gas markets.
Policymakers in Sacramento, over many decades, have operated under the assumption that if petroleum production, refining capacity, and fuel consumption were made sufficiently difficult and expensive, the market would rapidly transition to their preferred alternatives. The California Air Resources Board (CARB) has been the principal vehicle for implementing this vision through increasingly stringent fuel regulations, emissions mandates, low-carbon fuel standards, permitting requirements, and compliance costs imposed upon refiners operating within the state.
Yet the result has not been the energy transition that was promised. Instead, California has become increasingly dependent on foreign suppliers for products it once produced itself. This trend is particularly problematic because California is effectively an energy island. Unlike much of the United States, California lacks extensive pipeline connections to the major refining centers along the Gulf Coast.
The state also requires unique fuel formulations that relatively few refineries outside California are equipped to produce. Consequently, California’s fuel market functions largely as a self-contained system. When local refining capacity disappears, replacement supplies cannot simply be redirected from Texas or Louisiana with the turn of a valve.
Eco-Planners
Over the last several years, after decades of extreme regulatory mandates, California has faced a steady decline in its refining capacity. Facilities have been closed, converted to renewable fuel production, or slated for shutdown.
The closure of major refineries, including facilities in the Los Angeles and San Francisco Bay regions, will remove hundreds of thousands of barrels per day of refining capacity from a state that already operates with limited redundancy. Defenders of these policies argue that refinery closures merely reflect declining gasoline demand. The data, however, tells a more complicated story.
Gasoline consumption has indeed declined from its peak. But the decline is far less remarkable than many political leaders imply. California gasoline demand is roughly 15 percent below peak levels. More importantly, only a small portion of that reduction can be attributed directly to electric vehicle adoption.
It is estimated that EVs account for only about 6.4 percent of gasoline demand displacement relative to a 2010 baseline. Most of the reduction has come from conventional improvements in vehicle efficiency, changing consumer behavior, and the recent net outmigration of higher-income residents.
In other words, the state’s energy eco-planners appear to be betting on a future that has not yet arrived.
Petroleum demand remains substantial. Californians still drive, transport goods, operate agricultural equipment, fly on commercial aircraft, and depend upon diesel-powered logistics networks. The physical economy continues to require large quantities of refined petroleum products. Yet refining capacity is being eliminated faster than demand is disappearing.
This creates an increasingly dangerous imbalance.
As local production declines, California is becoming more dependent on imported refined products arriving by tanker from overseas refiners, including South Korea and India. What’s more, this imported gasoline is often refined from Russian oil.
These imports can fill supply gaps during normal conditions. However, they also introduce new vulnerabilities that did not previously exist.
Energy Outsourcing
Every additional barrel imported from across the Pacific increases the dependence on international shipping lanes, foreign refining capacity, port infrastructure, and geopolitical stability. Supply disruptions that once would have been regional now become global.
A refinery outage in California can no longer be viewed in isolation. It must be considered alongside maritime bottlenecks, international conflicts, labor disputes, and disruptions thousands of miles away.
The irony is difficult to ignore. California’s climate policies were designed to reduce dependence on fossil fuels. And while they’ve reduced dependence on California-produced and California-refined fuels, they’ve increasing dependence on imported petroleum products refined elsewhere under regulatory regimes that are far less stringent than those imposed domestically.
From an economic perspective, this is not an energy transition. It is an energy substitution. The state is not eliminating the need for petroleum. Rather, it is increasingly outsourcing the production and refining of that petroleum to other jurisdictions while retaining the same underlying consumption requirements.
History suggests that prosperous societies are built upon abundant, reliable, and affordable energy. California’s policymakers have chosen a different path. One that assumes future technological adoption will occur rapidly enough to offset the loss of existing infrastructure.
Maybe that assumption will be proved correct. But if the assumptions are wrong, Californians will discover that refining capacity, once dismantled, cannot be easily recreated. Energy systems are built over decades. When central planners remove them to try and force an ideal that the market does not demand, they’re asking for trouble.
When the fuel pumps run dry and prices spike, wishful thinking won’t power the economy. Hope is a terrible strategy when you’re playing chicken with the fundamental mechanics of everyday living.
Empty Shelves and Rotten Crops
So, what does this actually look like when the chickens finally come home to roost? Fast forward a few years into this self-inflicted bottleneck, and the reality of living on an energy island gets incredibly uncomfortable.
Picture this: a minor maritime dispute in the Pacific or a routine maintenance delay at an overseas refinery triggers a sudden supply dip. In the old days, a local refinery would ramp up production. Not anymore. Because Sacramento successfully regulated local refining into extinction, California is left stranded at the end of a very long, very fragile global line.
Suddenly, fuel rationing is a regular occurrence. Gas stations feature long, miserable lines with “Out of Service” bags zipped over the regular unleaded pumps. Prices at the pump don’t just spike. They skyrocket to levels that make the old record-highs look downright cheap.
But it’s not just about commuter headaches. The real pain hits the backbone of the state. Grocery store shelves go sparse because diesel-powered delivery trucks are sidelined or waiting on fuel quotas. Jet fuel shortages ground regional flights, and Central Valley farmers are forced to make brutal choices about which crops to leave rotting in the fields because running the tractors is cost prohibitive.
The ultimate kicker? The environment doesn’t even win.
The state still burns the oil. It just pays a massive premium to ship it across the ocean on carbon-belching tankers. It’s a crisis completely designed, engineered, and executed by the central planners in Sacramento.
They bet the house on a utopian timeline and lost the wager. Once again, Californians are left to pick up the tab on their folly.
[Editor’s note: Get a free copy of an important special report called, “Fission for Millions – The Ultimate Bet on the AI Energy Crisis,” when you join the Economic Prism mailing list today. If you want a special trial deal to check out MN Gordon’s Wealth Prism Letter, you can grab that here.]
Sincerely,
MN Gordon
for Economic Prism
Return from California’s Self-Inflicted Squeeze to Economic Prism
