Gasoline, diesel and jet fuel refining capacity is too low in the United States to meet demand

From record gasoline prices to higher airfares to fears of diesel rationing, the runaway US energy market is worrying both American travelers and the broader economy. But the main driver isn’t high crude prices or even rebounding demand: it’s just too few refineries turning oil into usable fuels.
More than a million barrels a day of the country’s refining capacity – or about 5% in total – has shut down since the start of the pandemic. Elsewhere in the world, capacity has shrunk by an additional 2.13 million barrels per day, estimates energy consultancy Turner, Mason & Co. And with no plans to commission new US plants, even if refiners make record profits, the supply shortage will only get worse.
“We’re on a knife edge,” said John Auers, executive vice president of Turner, Mason & Co in Dallas. “We are ripe for a possible supply crisis.”
The lack of refining capacity has dire consequences for US consumers and global markets. At home, retail gasoline prices continue to hit new highs, exacerbating some of the worst inflation that American households have ever seen.
Meanwhile, the East Coast is on the brink of a diesel shortage that risks crippling already strained supply chains that have disrupted the flow of everything from basic groceries to building materials over the past two last years. The factors fueling the refining shortage will come as no surprise: With demand for gasoline and jet fuel having all but disappeared at the height of the pandemic, companies permanently shut down some of their less profitable crude processing plants.
Some of these factories had been hit by fires, explosions and hurricanes and were simply too expensive to fix, especially because a possible transition to cleaner energy makes their long-term business model unprofitable and makes them less likely to attract buyers. By the end of 2023, up to 1.69 million barrels of U.S. capacity is expected to be shut down from 2019 levels, according to Turner, Mason & Co.
At the same time, US refining is contracting, the war in Ukraine has further widened the global gap between supply and demand. While many countries shun Russian fuel exports in the wake of the war, the United States now supplies more of the world’s fuel with a shrinking plant base. Europe has been seeking alternatives to Russian diesel since the start of the war, while fuel demand in Latin America, the biggest buyer of US refined products, is strong and growing. Meanwhile, the United States is preparing itself for a peak in consumption this summer.
This sets up refiners to reap record profits this year. Valero Energy Corp is considered the most cash-generating since its shares began trading in 1997, while top refiner Marathon Petroleum Corp. is expected to post its highest margins in a decade. The two companies are the second and 10th best performers on the S&P 500 index this year, respectively, as of Friday morning.
Retail gasoline and diesel prices hit new highs of $4.432 and $5.56 a gallon respectively, according to AAA data released Friday. US gasoline futures also hit a new high.
In other types of markets, an increase in demand and a shortage of supply would trigger more investment, especially with such hordes of liquidity. But the longer-term transition away from fossil fuels is clouding the demand outlook, making companies unwilling to invest the billions of dollars needed to build new plants.
Even resurrecting idle factories can be prohibitively expensive at a time when US construction and labor costs are soaring. As California unveils a roadmap this week to cut oil use 91% below 2022 levels by 2045 and other places move to limit fossil fuel use in decades ahead, refiners and their investors can see the writing on the wall.
“There is nothing in the current environment that favors fossil fuel investment,” said Bloomberg Intelligence analyst Fernando Valle. “That’s a 15 to 20 year payback on most of those investments.”
Phillips 66, for example, is expected to spend more than $1 billion to restart its Alliance refinery in Louisiana, which was shut down after damage from Hurricane Ida, Bloomberg Intelligence estimates. LyondellBasell Industries NV has chosen to shut down its Houston refinery no later than the end of 2023 due to cost issues associated with operating the 104-year-old facility.
Some of the closed plants are now being converted to small renewable diesel facilities, including the Phillips 66 refinery in Rodeo, California, which was confirmed this week.
As for selling those assets to someone who could increase production, no one is buying — even though industry players are sitting on huge piles of cash. “We feel we have higher returns, better uses of capital to employ than buying a refinery that’s on the market right now,” Valero CEO Joe Gorder said during the interview. a conference call with analysts at the end of April.
Certainly, there could be some small-scale relief to come. U.S. refiners ran at 90% last week, and that percentage will increase as seasonal maintenance wraps up this month. Some units can then even operate 10% or 20% above their rated capacity to maximize short-term production.
But this is a rate that cannot be maintained without risking damage. A few refineries are also focusing on debottlenecking or even adding new units inside existing facilities to increase capacity, although this is a drop in volume from the total already lost – and that will only happen. ‘in 2023 or 2024. In short, ‘too much refining capacity has been shut down during the pandemic,’ Valle of Bloomberg Intelligence said. ‘Diesel shortages and price spikes are likely to last.’