- There appears to be no end in sight for the current fuel supply crisis, with summer demand set to spike while refineries run at an unsustainable rate.
- While refineries have the ability to bring more capacity online, investors are unwilling to get involved in long-term oil and gas projects.
- U.S. fuel exports have hit record highs and the banning of Russian oil imports by the European Union will only add to demand.
Last week, Bloomberg reported, citing anonymous sources, that the Biden administration was looking into the possibility of restarting idled refineries in order to boost fuel production and tame prices.
Meanwhile, operating refineries are running at utilization rates of over 90 percent, which, according to industry insiders, is an unsustainable rate. And come hurricane season, if there is refinery damage, things could get really ugly with the fuel supply situation.
Welcome to the downstream nightmare of the energy world.
The United States has lost around 1 million bpd in refining capacity since 2020, according to a Reuters report that also cited one analyst, Paul Sankey, as saying this meant the country is in what is effectively a structural shortage of such capacity. Globally, refining capacity has shrunk by over 2 million bpd since 2020.
According to the International Energy Agency, this is not a problem at all. The IEA estimated that global refining capacity shed 730,000 bpd last year and that this year, refinery runs would be about 1.3 million bpd lower globally than what they were in 2019.
The reason that would be no problem for the IEA is that demand for oil is seen as 1.1 million bpd lower than what it was in 2019.
Not everyone is so calm, however, especially in the United States, where retail fuel prices are breaking records while refiners convert their refineries to biofuels production plants.
"It's hard to see that refinery utilization can increase much," Gary Simmons, chief commercial officer of Valero, told Reuters. "We've been at this 93% utilization; generally, you can't sustain it for long periods of time."
Interestingly enough, despite the imbalance in supply and demand, which has pushed the crack spreads to the highest in years, refiners do not seem to be planning new capacity additions. The reasons: time and investor sentiment.
"Investors do not want to see companies pouring money into organic oil and gas growth," Jason Gabelman, director at Cowen, told Marketplace last month.
In addition to this, building a new refinery is a lengthy and expensive endeavor that few refiners appear to believe is justified despite the record crack spreads.
Also, investors have become more impatient and don't want to wait for returns from projects such as new refineries.
At the same time, demand for refined products remains strong: U.S. fuel exports are running at record rates, a lot of them going to Europe, which, like the U.S., reduced its refining capacity over the last two years but now needs new sources of oil products after it embarked on an emergency course to cut its dependence on Russian oil and fuels.
Speaking of Russia, sanctions have resulted in a substantial reduction of refining capacity, with Reuters estimating as much as 30 percent idled, with some 1.2 million bpd in capacity likely to remain offline until the end of the year, according to JP Morgan.
Meanwhile, in Asia and the Middle East, refining capacity has been on the rise. In Asia, the new additions have topped 1 million bpd, according to a Bloomberg chart, while in the Middle East, new refining capacity since 2019 has reached about half a million barrels daily.
The balance of refining capacity, then, has not just changed, but also shifted geographically. The U.S. two weeks ago exported 6 million bpd in refined petroleum products. After the EU approved an embargo on Russian crude and products, albeit "in principle" for now, chances are that demand for imports from the U.S. will rise further, straining U.S. refiners even more.
Then it will be time for hurricane season, and even if the Gulf Coast gets lucky this year, refinery closures in anticipation of storms making landfall are pretty much guaranteed, based on what we have seen in the past.
This does not bode well for fuel prices, which have become a major issue for governments on both sides of the Atlantic. There is a certain sense of irony in that one, although by no means the only reason for the capacity imbalance is investors' focus shift from oil and gas to alternative energy sources.
The way things look, refiners could build more refining capacity, but investors are unwilling to participate in the long-term growth of the oil industry, as Marketplace's Andy Uhler put it.
What this translates into is higher fuel prices for longer until demand begins to subside, which would probably happen at some higher price level.
In the immediate term, however, with driving season soon to be in full swing, the refining capacity situation will likely make a lot of lives harder.
And while gasoline is in the headlines because of the millions of drivers who have to pay a lot more at the pump, the bigger problem remains diesel—the fuel that the freight industry depends on to bring goods from producers to consumers all over the world.
Related: Russia Says It Will Find Other Oil Buyers After EU Ban