Despite high gas prices, US refiners are making an effort to meet summer demand
Only time will tell how much of a record US price at the pump will dampen this summer’s surge in demand, but don’t expect a huge increase in gasoline supplies from US refineries.
The reason: Many US gasoline refineries have been closed in recent years, or converted to other fuels, reducing US refining capacity and exacerbating the damage caused by high crude oil prices in the current energy crisis.
US refiners operated at 93.2 percent last week, the highest level since December 2019 and an exceptionally high rate for a season usually associated with plant maintenance.
All of this points to a strained US power system ahead of the summer driving season, which begins this weekend with the Memorial Day holiday.
“We’re ready to fail,” said Robert Yoger, an analyst at Mizuho Securities. “Basically, we’re prepared for prices to go up and inflation to go up, and that doesn’t bode well.”
But limited refining capacity is also a global problem, according to a note from Eurasia Group that described a narrow fuel market with little location convenience.
“Increasing demand is outstripping both storage capacity and production, leading to shortages,” Eurasia Group said.
“Currently, demand is withdrawing from this storage much faster than it can be replaced, depleting stocks and driving up refined product prices. While IEA data from this week shows an increase in global refinery production capacity, it is still below pre-pandemic levels.
Besides raising crude oil prices, the Ukrainian invasion has also hampered supplies of some refined products exported from Russia, especially low-quality gas oil.
– Transforming and closing plants –
Gasoline prices in the United States have risen more than 70 percent in the past year to hit record levels, averaging about $4.60 per gallon. Analysts at JPMorgan Chase believe prices will rise steadily this summer, surpassing $6.00 a gallon.
The number of active refineries in the United States has declined by 13 percent in the past decade and now stands at the lowest level in the modern era.
The shutdown list includes the Philadelphia Energy Solutions plant, which was the largest in the northeastern US before it closed in June 2019 after an explosion.
This group includes some of the refineries that were suspended early in the pandemic as demand for fuel waned. Some have not yet restarted, such as the Marathon Petroleum refinery in New Mexico.
Andy Lebow of Lipow Oil Associates, said the issue “has become a bigger concern here in the US as we’ve shut down 1 million barrels per day of refining capacity over the past year.”
Large US refineries are also converting some of their capacity to biofuels and other renewable fuels in light of policies to tackle climate change favored by investors who prioritize environmental, social, and governance (ESG) goals.
At its Cheyenne, Wyoming, refinery, HollyFrontier is converting a 52,000 barrel per day refinery from gasoline production to renewable diesel.
– Market share dwindling –
But many in the oil industry are loath to undertake important new refining projects in light of the huge investments by automakers such as General Motors and Ford to build electric cars that would reduce the market share of gasoline as a transportation fuel.
Major airlines have also pledged to use more renewable fuels and reduce demand for jet fuel, another product in petroleum refineries.
Experts also pointed to policies such as a ban on the sale of new petrol cars after 2035 that the European Union is considering.
“Laws like this are a clear indication that at some point the demand for your product will decline,” said Bill O’Grady of Confluence Investment Management. “There is very little incentive to invest.”
Building a new refinery requires huge capital, years of planning and regulatory approvals, and won’t pay off for 10-20 years, said Richard Sweeney, professor of economics and economics at Boston College.
“Gas prices are very high, diesel prices are very high,” Sweeney said.
Many refiners funnel the extra money from today’s strong market toward dividends and shareholder buybacks, which Wall Street favors.
The last major US refinery opened in the United States in 1977 and there have only been five new plants in the past 20 years, all of which are smaller refineries.
When refineries added significant capacity, it was through expansions of existing plants rather than new projects.
“No society wants a refinery,” O’Grady said. “It’s dirty. It explodes. It smells bad.”
Phil Flynn of Price Futures Group said the current global refining predicament is based on a “false assumption that we can do without refining.”
“We will have to balance our dreams about ESG against the reality of trying to keep the market supplied with products.”