LONDON, June 16 (Reuters) – U.S. President Joe Biden has written to major oil companies complaining about high gasoline and diesel refining margins and demanded explanations for refinery closures since 2020.

The president’s letter, dated June 14, should be seen primarily as a political exercise in deflecting blame for high fuel prices and accelerating inflation (“Biden warns oil bigs against producing ‘essence’, Axios, June 15).

He blamed historically high profit margins achieved by refiners for causing an “unprecedented disconnect” between the international price of crude oil and the retail price of gasoline.

Join now for FREE unlimited access to Reuters.com

Register

“In wartime,” the president wrote, record margins “are not acceptable” and demanded that companies immediately increase supplies of gasoline and other refined fuels.

GLOBAL FACTORS

Biden acknowledged that Russia’s invasion of Ukraine had been the main driver of rising oil and therefore gasoline prices. Russian President Vladimir Putin has been quad-checked to make sure readers know who to blame.

But the U.S. president also complained that a lack of domestic refining capacity and high margins are mitigating the impact of other measures the administration has taken to stabilize fuel prices for consumers.

He has already ordered an unprecedented release of crude oil from the Strategic Petroleum Reserve and eased gasoline blending regulations in a bid to keep pump prices down.

The shortage of refining capacity is a global problem, with more than 3 million barrels per day (bpd) offline since the start of the pandemic.

But the president noted that more than 800,000 bpd of capacity had shut down in the United States since 2020 and demanded an explanation.

He ordered the energy secretary to hold an emergency meeting with industry representatives and engage the National Petroleum Board to discuss the crisis.

He also called on companies to take “immediate action to increase the supply of gasoline, diesel and other refined products”.

And he said the administration was prepared to use all reasonable and appropriate emergency tools and powers to increase the refinery’s capacity and output.

CAPACITY LIMITS

US refineries are already operating near their theoretical maximum, so there is limited ability to extract more fuel from the current system.

(Book of maps: https://tmsnrt.rs/3b11h8m)

For the past several weeks, crude processing has operated at 93-94% of maximum operating capacity, which is between the 80th and 83rd percentile for all weeks since 1990.

But if refineries could raise that figure to the 95th percentile, that would only raise the utilization rate by 2.5 percentage points to 96.4%.

If the utilization rate could be raised to the 98th percentile, it would increase by 3-4 percentage points to 97.5%, but such high utilization rates have never been sustained for more than a few weeks at a time. .

In other words, the US refining system currently has approximately 1 million bpd of underutilized (19th percentile) crude processing capacity.

If the system operated at very high temperatures, it could potentially reduce idle crude processing capacity to 600,000 bpd (5th percentile) or even 400,000 bpd (98th percentile), but that would be difficult to sustain.

Further processing would yield no more than 600,000 bpd of product, roughly split between light distillates such as gasoline (400,000 bpd) and middle distillates such as diesel and jet fuel (200,000 bpd), and likely less .

New crude distillation or downstream processing units would take at least two to five years from an initial investment decision to commissioning, so they would not be available until the middle of the decade.

Even debottlenecking existing units to incrementally increase capacity will likely take 12-18 months – and units must be taken offline for upgrades to occur.

CAPACITY REDUCTIONS

Operational refining capacity in the United States has declined by approximately 1 million bpd since the start of 2020, according to data released by the US Energy Information Administration (“Monthly Refinery Report”, EIA, May 2022).

But about two-thirds of the total is attributable to the closure of three refineries:

  • Philadelphia Energy Solutions closed its Pennsylvania refinery (335,000 bpd) after an explosion and the operator went bankrupt.
  • Marathon is converting the Martinez refinery in California (161,000 bpd) into a biofuels plant as part of California’s energy transition program.
  • Shell closed the Convent refinery in Louisiana (240,000 bpd) as part of its strategy to transition to a low-carbon future and when it failed to find another buyer.

Even before the pandemic, many refiners were reluctant to replace outdated or damaged equipment, let alone increase capacity, because the potential transition to more electric vehicles would reduce fuel demand.

The additional financial pressure resulting from pandemic-induced fuel economy reductions has accelerated the capacity reductions that likely would have occurred anyway.

The rationalization is the result of long-term pressures on the refining system, in particular the expected increase in alternatively powered vehicles.

Given the significant capital involved in refinery upgrades and reconfigurations, long planning and construction lead times, and long payback periods, these decisions cannot be reversed easily or quickly.

As a result, the capacity available for 2022 and 2023 is largely fixed and almost all of it is already used, leaving little room to increase production in the short to medium term.

On behalf of the industry, the trade association American Fuel and Petrochemical Manufacturers has already explained the constraints in a letter it sent to the White House on June 15.

Even the White House has noted that “you have sufficient market incentive” to increase fuel production if possible, underscoring the constraints under which refineries operate.

The political imperative for the White House to lower gasoline prices before November has run into the practical problem that refining capacity is very tight in the short term and must be planned for much longer periods.

Associated columns:

– Global diesel shortages herald impending economic downturn (Reuters, May 19) read more

– Global diesel shortage pushes up oil prices (Reuters, March 24) read more

– Diesel is the inflation canary of the US economy (Reuters, February 9) read more

John Kemp is a market analyst at Reuters. Opinions expressed are his own.

Join now for FREE unlimited access to Reuters.com

Register

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.