New York (AFP) – Only time will tell how much record US pump prices will dampen demand this summer, but don’t expect a significant increase in gasoline supplies to US refineries.
The reason: Several gasoline refineries in the United States have closed in recent years or been converted to make other fuels, reducing United States refining capacity and exacerbating the effects of high crude oil prices in the current energy crisis.
U.S. refineries ran at 93.2% last week, the highest level since December 2019 and an unusually high rate for a season normally associated with plant maintenance.
Everything points to a stressed US energy system ahead of the summer driving season, which kicks off this weekend with the Memorial Day holiday.
“We are set for failure,” said Robert Yawger, analyst at Mizuho Securities. “Basically, we’re ready for high prices, rising inflation, and that doesn’t bode well.”
But limited refining capacity is also a global issue, according to a memo from Eurasia Group that describes a tight fuel market with little relief on the site.
“Increasing demand is outstripping both storage and production capacity, leading to shortages,” Eurasia Group said.
“Right now, demand is drawing down that storage much faster than it can be replaced, depleting inventories and driving up refined product prices. While data from the International Energy Agency this week shows as global refinery throughput capacity increases, it still remains below pre-pandemic levels.”
In addition to rising crude prices, the invasion of Ukraine has also reduced the supply of some refined products exported from Russia, particularly poor quality gasoil.
Factories are converted, closed
U.S. gasoline prices soared more than 70% last year to record highs, nationally averaging about $4.60 a gallon. JPMorgan Chase analysts believe prices will rise further this summer, topping $6.00 a gallon.
The number of active US refineries has fallen 13% over the past decade and is now at the lowest level in the modern era.
The list of closures includes the Philadelphia Energy Solutions plant, which was the largest in the northeastern United States before being closed in June 2019 following an explosion.
This group includes some refineries that were suspended at the start of the pandemic due to lower fuel demand. Some, like the Marathon Petroleum refinery in New Mexico, have never been restarted.
The problem has “become a bigger concern here in the United States as we shut down one million barrels per day of refining capacity over the past year,” said Andy Lipow of Lipow Oil Associates.
Major U.S. refineries have also shifted some of their capacity to biofuels and other renewable fuels in light of investor-favored climate change policies that prioritize environmental, social and governance (ESG) goals. ).
At its refinery in Cheyenne, Wyoming, HollyFrontier is converting a 52,000 barrel per day refinery from gasoline production to renewable diesel.
Declining market share
But many players in the oil industry are reluctant to take on major new refinery projects in light of heavy investment by automakers such as General Motors and Ford building electric vehicles that will reduce gasoline’s market share as transportation fuel.
Major airlines have also pledged to use more renewable fuels, reducing demand for jet fuel, another product of oil refineries.
Experts also pointed to policies such as a ban on the sale of new gasoline-powered cars after 2035 that are being considered by the European Union.
“Laws like this are a clear signal that demand for your product is going to drop at some point,” said Bill O’Grady of Confluence Investment Management. “There are very few incentives to invest.”
Building a new refinery requires significant capital, years of planning and regulatory approvals and would not pay off for another 10 to 20 years, said Richard Sweeney, professor of economics and economics at Boston College.
“Petrol prices are very, very high and diesel prices are very, very high,” Sweeney said, adding, “I don’t think anyone thinks this is going to last for years.”
Many refiners are directing the extra cash generated by today’s strong market into dividends and shareholder buyouts, which are favored on Wall Street.
The last major US refinery in the United States opened in 1977 and there have only been five new plants in the last 20 years, all smaller refineries.
Where refiners have added significant capacity, it has been through expansions of existing plants rather than greenfield projects.
“No community wants a refinery,” O’Grady said. “They’re dirty. They explode. They smell bad.”
The current predicament for global refining is based on a “false assumption that we can do without refining,” said Phil Flynn of Price Futures Group.
“We’re going to have to balance our ESG dreams with the reality of trying to keep the market supplied with product.”
© 2022 AFP