Despite record gasoline prices in the U.S., U.S. refineries are unable to catch up with demand due to a lack of capacity after a series of closures in recent years, contributing to the surge in fuel prices.
Last week, the refinery utilization rate in the United States rose to 93.2%, the highest since December 2019, breaking with the tradition of a May usually dedicated to maintenance, with limited facility utilization.
Supplies fall, prices soar
However, U.S. gasoline reserves have fallen again, to a level not seen at this time of year for eight years, while this weekend, a holiday in the United States (Memorial Day), marks the beginning of the major road travel season. “We’re headed for bankruptcy” of the system, warns Robert Yawger, an analyst at Mizuho Securities.
The “lack of capacity to process” oil into fuel, coupled with soaring crude prices, “has massively increased refining prices (…) in recent months and led to record prices for gasoline and diesel,” according to the Eurasia Group.
Gasoline prices are at an all-time high in the U.S., up more than 70% in one year. Analysts at JP Morgan Chase see it rising by more than 30% over the summer, to more than $6 per gallon (3.78 liters).
The number of refineries is decreasing
The number of operating refineries has dropped by 13% in ten years and is now the lowest in the modern era. In addition to the planned closures, there is the explosion of the PES refinery in Philadelphia, the largest facility in the northeastern United States, in June 2019. Thus, the site has definitely closed.
“It’s a growing concern in the U.S., because we’ve lost more than a million barrels per day of capacity in a year,” according to Andy Lipow of Lipow Oil Associates.
In the early months of the pandemic, some sites were shut down to adjust to the slowdown in demand, but not all have been brought back on line since, such as the Gallup, New Mexico, site owned by Marathon Petroleum.
Most of the major refiners have initiated the conversion of some of their equipment to produce biofuel, resulting in the temporary suspension of their operations.
And in the case of HollyFrontier, the transition to renewable fuel has, for example, reduced the capacity of its Cheyenne, Wyoming, facility from 52,000 to 6,000 barrels per day.
“It smells bad”
The war in Ukraine increases structural tensions. The West is turning away from Russia, a major supplier of refined products, especially diesel.
This has led to increased export demand for U.S.-produced fuel, further unbalancing the supply/demand relationship.
“You could rebuild capacity in the Northeast … but those are investments that would have to pay for themselves over 10 or 20 years,” argues Richard Sweeney, professor of environmental economics at Boston College.
“Yet the general trend is one of a declining industry.” “A refinery takes five or six years to build, (…) knowing that the demand for your products is probably going to go down,” agrees Bill O’Grady of Confluence Investment Management, “so there is very little incentive to invest.”
Many of the major U.S. refiners have chosen to spend a significant portion of their current profits on share buybacks and dividends rather than on massive investments.
The last time a major refinery opened in the United States was in 1977, and only five new sites have opened in the last 20 years. “What complicates the issue is that no community wants a refinery” within its borders, O’Grady says. “It’s dirty, it can explode, it smells bad.”
“Governments are trying to become more environmentally responsible and discourage investment in refining … but you end up with a capacity shortage,” argues Phil Flynn of Price Futures Group.
For him, “we will have to find a balance between our ESG dreams (environmental, social and governance criteria) and the reality of trying to supply the market” with petroleum products, while waiting for the supply of renewable energy to be sufficient to replace them.
