EnergyLack of Growth in Petroleum Refinery Development Contributes to High Fuel Prices

Like anything related to energy, it takes years for companies to jump through the logistical and regulatory hoops required to expand capacity — and federal red tape has all but eliminated the possibility of new construction.

“My personal view is there will never be another refinery built in the U.S.,” Chevron CEO Mike Wirth said in June as gas prices jumped.

The last new major petroleum refinery in the U.S. was constructed in 1976 in Garyville, Louisiana. Since then, additions have been made to numerous refineries, but each is a modest jump in the nation’s total refining capacity.

Texas is home to four of the eight largest refineries in the U.S. Saudi Aramco’s Port Arthur facility can refine 626,000 barrels (bbl) of petroleum per day, followed by Marathon’s Galveston Bay Facility with its daily refining capacity of 593,000 bbl.

ExxonMobil’s Baytown and Beaumont facilities collectively refine about 930,000 bbl per day.

Texas’ 30 refineries are responsible for one-third of the nation’s refining output — over 5.9 million bbl per day. According to the American Fuel & Petrochemical Manufacturers (AFPM), American refiners are running at 93 percent capacity, up from the coronavirus pandemic-spurred 86 percent in 2021 and 79 percent in 2020. But despite running near capacity, the U.S.’s refinery situation is a significant contributor to the higher gas prices dotting street corners.

“Today’s situation did not materialize overnight and will not be quickly solved,” AFPM President and CEO Chet Thompson said in a letter to the Biden administration, responding to the president’s letter gibing producers for pulling in “profit margins well above normal.”

“The lack of refining capacity — and resulting unprecedented refinery profit margins — are blunting the impact of the historic actions my Administration has taken to address Vladimir Purin’s Price Hike and are driving up costs for consumers,” Biden complained.

While the U.S. fleet is producing at above 90 percent capacity, both China and Russia have curtailed their refineries’ outputs.

Refineries are the biggest link between the wellhead and the gas pump, and one of the least discussed reasons why gas prices have ballooned.

A survey of oil and gas producers conducted last month by the Dallas Federal Reserve pinned much of the blame for a bleak outlook on the federal government’s policy. Average gas prices across the state have dropped slightly but still hovered over $4.00 per gallon throughout the last couple of months.

But one problem that’s worsened for years is the bottleneck at the nation’s refineries. With a snail’s paced growth in refinement capacity, that doesn’t leave much slack to adjust to rapid changes in the oil market like the world experienced during the coronavirus pandemic. And while the U.S. refinery fleet is unchanged or waning some, countries in the Middle East and Asia are building new refineries.

When travel demand dissipated in a matter of weeks, not only did it send oil futures prices plunging to negative values, but it also threw a wrench into the status quo of the refinery business.

The Renewable Fuel Standard (RFS) — a federal rule passed in legislation in 2005 that requires biofuel integration into the nation’s fuel supply — set the ball rolling on federal policy’s push toward renewable fuel production. This sped up when the pandemic hit and the crude oil market took a tumble. Rather than close their facilities that could at the moment no longer turn a profit, refineries turned to biofuel production.

As of early June, AFPM said the RFS was adding $0.20 onto the price of every gallon of gasoline.

When the travel demand began to return in the first half of 2021 along with a renewed demand for oil, leading to a rise in gas prices, petroleum had to compete more with biofuels for available refinement capacity.

It’s not only the prospective gasoline supply that is lost when operations switch to biofuels, but all the other potential petroleum products like diesel, asphalt, and more.

Diesel prices are also on the rise as its supply shrinks, not only due to less refinery-produced fuel but also because of another regulation. The International Maritime Organization, an arm of the United Nations that regulates cargo shipping, changed its fuel standards to clamp down on bunker oil used as fuel. This has caused cargo ships to switch to diesel fuel, increasing demand for diesel beyond the trucks on the road.

A regulatory blockade to new large-scale refinery development is the Clean Air Act’s emissions restriction, which prohibits new emissions of sulfur and other similar pollutants.

In Wirth’s estimate, those regulations and the current economic outlook preclude companies from investing in new refineries.

“When I began my career, there were more than 250 refineries in the U.S. Today, there are half that number,” he said. Wirth added that as China and Russia — the latter due largely to the ongoing conflict in Ukraine — reduce the products they put into the market and as U.S. refineries close, there’s not enough supply to meet demand.

“You’re looking at committing capital 10 years out that will need decades to offer a return to shareholders, in a policy environment in which governments around the world are saying we don’t want these products to be used in the future,” Wirth said, alluding to the push to eliminate fossil fuel use.

“My message [to the White House] would be: we need to sit down and have an honest conversation, a pragmatic and balanced conversation about the relationship between energy, economic prosperity, national security, and environmental protection. All of those matter and we can’t over-index on just one.”

One of the Biden administration’s responses to the recent spike in gas prices was to release 130 million bbl of oil from the United States Strategic Petroleum Reserve (SPR) — a total that amounts to a week of the nation’s consumption. However, that petroleum still needs to be refined into gasoline, diesel, or whatever else it’ll be repurposed for. That new supply doesn’t alleviate the refinery logjam.

Earlier this month, about 5 million barrels of that tranche were exported to parts of Asia and continental Europe. The SPR supply gained an additional 77 million bbl back in 2020, purchased by the Department of Energy as its price cratered from the initial brunt of the coronavirus pandemic — a maneuver directed by former President Donald Trump.

Kenny Stein, policy director at the Institute for Energy Research, called the confluence of issues a “disaster.”

“It’s multiple overlapping things that were foreseeable but are now combining at the worst possible time,” he told The Texan.

Gas prices have dropped a bit in recent weeks and will likely continue to fluctuate. But the bottleneck in America’s and Texas’ refineries is not so easily diminished, as it takes years to build new plants.

And at the moment, developers keen on taking on that kind of investment are few and far between.