>>make it extremely profitable for a couple of new large refineries to be built by exempting them from a lot of regulations<<
Even if you could do that, which is doubtful, where would California get the oil? Given the international economics involved, what could California do to compete with China and India for scarce supplies of global oil?
The world oil market is stretched very tight, with a shortage of easy-to-refine light sweet crude which is the stuff going at almost $60/barrel. Heavy crude is cheaper, especially heavy sour (high sulfur) crude. But heavy crude requires more expensive refineries, and heavy sour crude requires hugely more expensive refineries. The extra oil coming on line that Saudi Arabia recently promised to Bush is heavy sour crude. The fastest growth in demand for oil is in India and China, which is a lot closer to the Mideast than California. These countries are adding refinery capacity for heavy sour crude.
I think it's unlikely that any new oil refineries will be built in the USA, mainly due to supply problems and the higher costs of refining the lower grades of crude. If there is any capacity expansion, it will probably be at existing refineries.
However, there is a group in southern Arizona that is trying to build a new refinery. They face three hurdles: environmental permits, financing, and getting a contract for long-term crude from PEMEX (the Mexican state oil company). PEMEX is an absolute basket case with declining production. Maybe if you were Arizona governor you could grease the wheels a little with the regs, but I doubt this refinery will ever get off the drawing boards. If PEMEX ever gets its act together, the extra production may just as well go to other existing refineries that have a shortage of crude from places like Venezuela.
Oil is a Y2K industry. At some point in the not-too-distant future we'll have excess global shipping and refinery capacity faced with depleting supplies. The free market cannot overcome geological reality.
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