President Joe Biden is asking oil refiners to manufacture more fuel and help him tame record gas prices, but the shortage of refining capacity holding them back was years in the making and can’t be quickly remedied.
Biden’s letters to seven of the nation’s largest refinery operators solicited more output from the industry while criticizing refiners for overseeing high profit margins. However, a look at the scale of refinery losses over the past three years, which have been largely driven by the toll of the COVID-19 pandemic, regulations, and investor preferences for fossil fuel alternatives, illustrate just why industry leaders are warning there’s no easy fix.
OIL TRADE GROUPS REBUT BIDEN REFINERY CLAIMS AND NOTE ‘WORLD-LEADING’ CAPACITY
At least eight refineries have either closed altogether or converted capacity to manufacturing renewable fuels since 2019, taking around 1.1 million barrels per day of refining capacity offline and driving the current supply-demand imbalance in fuel markets.
Around 800,000 bpd of capacity came offline in 2020 alone, thanks in large part to the demand destruction triggered by the COVID-19 pandemic.
Shell shuttered its Convent, Louisiana, refinery in November 2020, which had 240,000 bpd of capacity, citing the financial toll of the pandemic.
Marathon has closed, or converted to renewable fuels manufacturing, facilities that were capable of refining more than 200,000 bpd.
Before the pandemic struck, Pennsylvania Energy Solutions shut down its refinery in Philadelphia after a massive explosion shook the 335,000 bpd facility. The refinery has since been bulldozed.
By the end of next year, even more capacity is scheduled to be taken offline.
Phillips 66 intends to shut down its 44,000 bpd refinery in Santa Maria, California, as it plans to convert its refinery in Rodeo to a renewable fuels facility. The company said in a May 11 announcement that the facility, which now has a capacity to refine 140,000 bpd, is expected to start making renewable diesel and sustainable aviation fuel in the first quarter of 2024.
If Dutch chemical giant LyondellBasell doesn’t find a buyer that’s interested in keeping its Houston refinery up and running, refinery capacity will fall by another 268,000 barrels per day.
LyondellBasell announced its intent to close the refinery in April. Interim CEO Ken Lane emphasized at the time that Lyondell’s exit would serve its goal of achieving net-zero greenhouse gas emissions by 2050.
Refiners and other oil industry players have pointed to this mix of pandemic-driven financial losses and climate change-related business decisions for driving refinery closures and leading to higher prices.
The heads of the American Petroleum Institute and American Fuel & Petrochemical Manufacturers publicized their response to Biden’s rebuke on Wednesday, providing their own take on the matter. Among their list of seven “realities” behind the current price environment is that oil refining is a “long-cycle” industry in need of business certainty — certainty they say their members haven’t received from the administration.
“Following on your campaign promise to ‘end fossil fuel,’ consider just some of the policy and investment signals being sent by various federal agencies and allied state governments to the market about our refining industry,” API’s Mike Sommers and AFPM’s Chet Thomspon wrote to Biden, listing the administration’s stringent light-duty fuel economy standards and the SEC’s climate-related risk disclosure proposal as efforts that have discouraged investment.
Others have also noted government policies favoring renewable fuel production, behind which the Biden administration just threw its full weight by finalizing record blending requirements under the renewable fuel standard, as well as green investment principles, for driving investment away from oil refining.
“The reality is that a lot of the current situation has been a long time coming, and the Russian situation exacerbated it, but all the factors leading us to where we are today predate that extensively,” a refining industry official told the Washington Examiner.
The sum of it all is making investors ever less interested in spending on fuel manufacturing, the source said, even while independent energy bodies such as the International Energy Agency forecast rising fuel demand for years to come.
Some companies have decided to add refining capacity in recent years, including ExxonMobil and Valero, whose plans together envision an additional 300,000 bpd of capacity.
Overall, though, the person said, “Investors are going to say, no, as soon as this crisis is over, everybody’s going to go back to wanting [refiners] to go away.”
Refiners have nonetheless had a lucrative few quarters as they’ve ramped up operations to above 90% capacity. For example, Valero’s first-quarter refining margin more than doubled over last year’s.
Biden criticized refiners for such high, “not acceptable” profit margins in his letters and noted the strain that drivers face for having to pay more than ever for fuel. Gasoline is just over $5 per gallon on average as of Wednesday, according to AAA.
The refining industry source noted that high margins have been lucrative for refiners and said they’re helping companies to overcome massive pandemic losses while asserting that the current environment has considerable drawbacks for the industry.
“This isn’t the margin environment that I think the industry wants to be in because nobody views this as sustainable,” the source said. “Today, it is helping folks overcome the literally tens of billions of dollars of losses they experienced over the last two years, and it’s helping get folks back to zero. But, you know, in some cases, getting back to zero and then being thrown into a recession — you still face a host of problems that you faced two years ago that were made egregiously worse by the pandemic.”
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Biden asked the recipients of his letters, which included ExxonMobil, Chevron, and Marathon, to come up with solutions and said he’s considering using emergency authorities to raise refinery output.
White House press secretary Karine Jean-Pierre specified Wednesday that the emergency authorities under consideration include those provided under the Defense Production Act, a law that Biden has repeatedly invoked since he took office in an attempt to supplement production of everything from baby formula to transformers to electric grid components.
