NEW YORK: Only time will tell how much record gasoline prices in the United States will reduce driving demand this summer, but don’t expect a substantial boost in gasoline supply from American refineries.
The reason: Several US gasoline refineries have closed or been converted to create alternative fuels in recent years, restricting America’s refining capacity and compounding the impact of high crude oil prices in the present energy crisis.
Last week, 93.2 percent of US refineries were operational, the highest level since December 2019 and an unusually high rate for a season traditionally associated with facility maintenance.
All of this leads to a stressed-out US energy system as the summer travel season begins this weekend with the Memorial Day vacation.
“We’re doomed,” warned Mizuho Securities analyst Robert Yawger. “Basically, we’re on track for high prices and rising inflation, which does not bode well.”
However, insufficient refining capacity is a global issue, according to a Eurasia Group research that depicted a tight gasoline market with little relief in sight.
“Increased demand is outstripping both storage and manufacturing capacity, resulting in shortages,” according to Eurasia Group.
“Right now, demand is emptying storage faster than it can be refilled, depleting stockpiles and driving up refined product prices. While estimates from the International Energy Agency this week show that worldwide refinery throughput capacity is improving, it remains below pre-pandemic levels.”
In addition to raising crude prices, the Ukraine invasion has reduced supply of several refined goods shipped from Russia, particularly low-quality gasoil.
Plants are being transformed and shuttered.
Gasoline prices in the United States rose more than 70% last year to record highs, averaging over $4.60 per gallon nationwide. JPMorgan Chase analysts anticipate prices will rise much further this summer, topping $6.00 per gallon.
The number of operating US refineries has decreased by 13% in the previous decade and is presently at its lowest point in modern history.
The Philadelphia Energy Solutions facility, the largest in the northeastern United States before it was closed in June 2019 due to an explosion, is among the closures.
This category covers certain refineries that were shut down early in the epidemic when gasoline demand plummeted. Some, such as Marathon Petroleum’s New Mexico refinery, were never restarted.
According to Andy Lipow of Lipow Oil Associates, the issue has “become a significant worry here in the United States as we’ve shut down a million barrels a day of refining capacity over the last year.”
Large US refineries have also shifted part of their capacity to biofuels and other renewable fuels in response to climate change legislation advocated by investors that value environmental, social, and governance (ESG) goals.
HollyFrontier is converting a 52,000 barrel-per-day refinery in Cheyenne, Wyoming, from gasoline production to renewable diesel production.
Market share is dwindling
However, many in the oil business are hesitant to engage in major new refinery projects in light of huge investments by automakers such as General Motors and Ford in electric cars, which would reduce gasoline’s market share as a transport fuel.
Major airlines have also committed to using more renewable fuels, which will reduce demand for jet fuel, another commodity produced by petroleum refineries.
Experts also mentioned proposals being proposed by the European Union, such as a ban on the sale of new gasoline-powered automobiles after 2035.
“Laws like those are a clear warning that demand for your goods is likely to fall at some time,” Confluence Investment Management’s Bill O’Grady said. “There is little reason to invest.”
According to Richard Sweeney, a professor of economics and the economy at Boston College, building a new refinery needs significant resources, years of planning, and regulatory permits, and would not pay off for 10-20 years.
“Gas costs are really high, and diesel prices are extremely high,” Sweeney said, adding, “I don’t think anyone believes that will endure years.”
Many refiners are directing additional income generated by today’s strong market toward Wall Street-favored dividends and share buybacks.
The last big US refinery built in 1977, and there have only been five new operations in the following 20 years, all of them are smaller refineries.
Refineries have gained substantial capacity through expansions of existing operations rather than greenfield initiatives.
“No community wants a refinery,” O’Grady said. “They are filthy. They blow up. They have a foul odour.”
The present global refining crisis is based on a “false premise that we can do without refining,” according to Price Futures Group’s Phil Flynn.
“We’ll have to weigh our ESG ideals against the reality of attempting to keep the market supplied with products.”