Biden is looking for oil refining capacity in America

The president is reportedly asking oil refineries and integrated companies to “restart the idle refineries”. The movement represents a fulcrum in three ways. First, the management acknowledges that prices at the pump are largely due to Lack of refining capacity. Second, the response appears to focus on increasing supply, rather than plans to redistribute taxes or trade embargoes. Third, the demand appears to be focused on US operators. The reported demand is a realistic first step to what could be a short-term and long-term solution to an acute problem, and can be both consumer and industry-friendly.

US oil refining capacity has been in decline for several years, despite stable demand. However, capacity has declined rapidly in recent years due to demand destruction caused by the pandemic, government incentives to convert large oil refineries into very small biodiesel plants, and a capacity decline of more than 1 million barrels per day. In selected cases, refineries have been converted into oil terminals. Importantly, not all advertised biodiesel conversions have been completed. And the president’s request, if combined with easing policy burdens, could transform the industry.

Philips (PSX) has announced plans to convert its 140 kbps Rodeo refinery in San Francisco into a 50 kbps biodiesel plant. The company is still in the permitting phase and could put plans on hold, effectively increasing refining capacity by 2023+. The Marathon Refinery (MPC) 166 kb/d is also in the process of allowing conversion to a 47 kb/d biodiesel plant. Par Pacific (PARR) has converted one of its four refineries into an oil terminal in Hawaii. Exxon (XOM) is expanding refining capacity in Texas, and Synovos Corporation (CVE) is rebuilding a refinery in Wisconsin. Outside of the Par Terminal (PARR) in Hawaii, it is unclear how many refineries are idle, as operators have the best margin environment in history and are operating steadily to meet demand.

Stopping in-process biodiesel conversions will have the dual benefit of increasing refining capacity in 2023+, while reducing food demand in the diesel basin. Fewer biodiesel plants would reduce demand for soybean (SOYB) at a time when food prices are at a record high. It remains to be seen whether the president’s request will include a suspension of biodiesel transfers; However, Friday’s announcement is an encouraging sign for consumers.