US Refining Bottleneck The Culprit For Your Gas Pump Pains

There is no quick fix to ease America’s pain at the pump because refiners struggle to meet the demand for diesel and gasoline, sending fuel prices soaring due to declining national stockpiles and fears of shortages. 

The latest Energy Information Administration (EIA) data shows the U.S. refining capacity is structurally short and down 1 million barrels from April 2020 (a month after the lockdowns began) to 17.95 million bpd as of June. 

“When the coronavirus pandemic occurred, demand for global oil was not expected to fall for a long time, and yet so much refining capacity was cut permanently,” Ravi Ramdas, managing director of energy consultancy Peninsula Energy, told Reuters. 

Goldman Damien Courvalin wrote in a note (available to professional subs) that “rising dislocation between crude and petroleum product prices finally reflects the current extreme tightness in global refining, driven by seasonality, disruptions as well as large-capacity closures.” He said refinery tightness would keep refined product prices higher throughout the year and also noted more refinery closures are slated by the end of next year. 

“The Covid demand shock, the accompanying excessively weak future demand expectations and the diversion of energy capital by ESG have led to c.4.2 mb/d of refinery capacity closures since 2019 with another 1 mb/d planned to be closed by end-2023. This resulted in near mid-cycle utilization rates of 82% at the start of the year, even before the China and Russia disruptions and in spite of partially IMO2020 related capacity expansions, as demand also quickly normalized. Looking forward we expect net capacity to fall -0.5 in 2022 and rise 1.5 mb/d in 2023 (YoY Dec-Dec) outside of China and Russia,” Courvalin noted. 

The Goldman analyst maps out that available global refinery capacity has been in a downward sloping curve since early 2020. This means as long as demand for refined products stays elevated, prices at the pump will remain higher because of the bottleneck in no new capacity coming online for a few years. 

The worsening refining bottleneck, especially in the U.S., was explained by Mike Wirth, the CEO of oil giant Chevron, who recently told Bloomberg TV that there’s not enough refining capacity to meet the demand for gasoline and diesel because no new refinery will ever be built in the U.S. again. 

Wirth explains his reason: “You’re looking at committing capital ten years out, that will need decades to offer a return for shareholders, in a policy environment where governments around the world are saying, ‘We don’t want these products to be used in the future.'” 

The crisis in refined products is because of the green energy transition forcing oil/gas companies, like Chevron and other majors, to not just shutter refineries but not invest and expand refinery capacity. This colossal failure has resulted in the national average for regular fuel approaching $5 a gallon by the end of this week. 

Just wait until he discovers that the latest bottleneck is refining https://t.co/uNFWpInCfi

— zerohedge (@zerohedge) June 5, 2022

… and here’s something else to fret about since refining capacity is limited: 

“If refineries in the U.S. get damaged during hurricane season, or anything else contributes to the market’s tightness, we could be in real trouble,” a Brazilian refining executive told Reuters. 

So it comes as no surprise President Biden’s SPR release of 1 million bpd has yet to arrest prices at the pump. It’s not that there’s not enough crude; the real problem is a bottleneck in refining — Americans that are suffering from out-of-control energy prices (Goldman now sees crude hitting $140 a barrel) should blame the green energy transition and those who support it for their financial misery as stagflationary threats grow.