A refinery, a bottleneck that exacerbates the boom in gasoline in the United States

posted on Sunday, May 29, 2022 at 6:45 am

Despite record gasoline prices in the United States, refineries are unable to catch up with demand due to a lack of sufficient capacity after a series of shutdowns in recent years that have contributed to soaring fuel prices.

Last week, the utilization rate of refineries in the United States rose to 93.2%, the highest since December 2019, breaking the tradition of May, usually dedicated to limited-use maintenance.

However, US gasoline supplies have fallen further to levels not seen for eight years at this time of year, while this weekend, Memorial Day, marks the beginning of the main road season.

“We are going to go bankrupt,” warns Robert Yawger, an analyst at Mizuho Securities.

“Insufficient capacity to convert” oil into fuel, which is contributing to rising oil prices, “has caused massive refinery price increases in recent months (…) and led to record gasoline and diesel prices,” according to Eurasia Group.

Gasoline prices in the United States are at historic highs, up more than 70% year on year. JPMorgan Chase analysts even see it rise more than 30% to more than $ 6 a gallon (3.78 liters) during the summer.

The number of refineries in operation has decreased by 13% in ten years and is now the lowest in modern times.

In addition to the planned closures, the PES refinery in Philadelphia, the largest facility in the northeastern United States, exploded in June 2019, followed by a final conviction.

“It’s a growing concern in the United States because we lost more than a million barrels a day in capacity in one year,” said Andy Lipow of Lipow Oil Associates.

In the first months of the pandemic, some sites were closed to accommodate the slowdown in demand, but not all have since been put back into operation, such as Gallup (New Mexico), owned by Marathon Petroleum.

Most large refineries have begun to convert some of their biofuel production facilities, leading to a temporary suspension of their operations.

And in the case of HollyFrontier, the switch to renewable fuel, for example, increased the capacity of its Cheyenne, Wyoming facility from 52,000 to 6,000 barrels per day.

– “It stinks badly” –

Structural tensions were further exacerbated by the war in Ukraine, which forced parts of the West to do without Russia, a major supplier of refined products, especially oil.

This situation led to increased export demand for fuel produced in the United States and did not further balance the relationship between supply and demand.

“You could restore capacity in the Northeast (…), but these are investments that should be profitable in 10 or 20 years,” says Richard Sweeney, a professor of environmental economics at Boston College. “But the general trend is one of the declining industries.”

“It takes five or six years to build a refinery, (…) knowing that demand for your products is likely to decline,” agrees Bill O’Grady of Confluence Investment Management, “so there is very little incentive to invest.”

Many large US refineries have chosen to devote a significant portion of their current profits to share repurchases and dividend payments rather than massive investments.

The last opening of a large refinery in the United States dates back to 1977, and only five new locations have been inaugurated in the last twenty years.

“The problem is further complicated by the fact that no community wants a refinery on their territory,” says Bill O’Grady. “It’s dirty, it can explode, it smells.”

“Governments are trying to be more environmentally responsible and discouraging investment in refining (…), but we are ending a lack of capacity,” said Phil Flynn of Price Futures Group.

According to him, “we will have to find a balance between our dreams of ESG (environmental, social and government criteria) and the reality of trying to supply the market” with oil products, while waiting for the supply of renewable energy is enough. .


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