Gas prices heavily depend on limited refining capacity
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very good article. edited below to remove most political stuff. please don't get into politics.
tl;dr - there hasn't been any new refining facilities built in the u.s. in half a century. the pandemic caused a huge drop in refined gasoline needs, so some refiners closed or were repurposed for other needs. now with demand high, the limited supply means high prices and no likelihood of any solution ANY time soon. so get used to it.
June 26, 20225:00 AM ET
BRITTANY CRONIN
[...]The national average price of gasoline surpassed $5 a gallon for the first time ever this month. Prices have edged down by a few cents in recent days, but remain elevated.
Exacerbating these high gas prices is a huge shortage in refining capacity in the U.S., which isn't likely to be resolved any time soon.
Refiners turn crude oil into usable products like gasoline, diesel, and jet fuel. There's just fewer refiners in the U.S. today than a couple of years ago.
Refining capacity in the U.S. is about a million barrels a day below what it was prior to the pandemic. That's left the country unable to meet its fuel needs as more people are commuting, traveling and driving as they emerge from the throes of the pandemic.
So, where did all the refineries go?
Some refineries shuttered during the pandemic-induced recession in 2020, when demand for gasoline took a nosedive. Not all of those refineries have come back online.The U.S. had five fewer refineries at the beginning of this year that at the beginning of 2020.
When the pandemic hit and demand for oil evaporated during the recession, refineries took a big financial hit when the price of gasoline plummeted. Some refiners threw in the towel. They said the numbers just didn't work, and closed up shop.
"When you're losing money on doing it, what do you do? You stop making it. And that's when you shut down refineries," says Denton Cinquegrana, chief oil analyst at Oil Price Information Service.
There were other disasters around the same time. A Philadelphia refinery, one of the largest in the country, was rocked by explosions a few months before the pandemic. In Louisiana, another refinery was wiped out by Hurricane Ida. Both have been shut down.
[...]"I think the refining executives say, well, looks like the writing's on the wall," Cinquegrana says.
In fact, some refiners have repurposed their facilities, where instead of making gasoline from oil, they're ramping up to produce renewable diesel and sustainable aviation fuel out of feed stocks like soybean oil and used cooking oil.
[...]Francisco Blanch, head of commodities research at Bank of America, points out that the country is still heavily reliant on gasoline despite those goals.
"The narrative until today was that we were going to be driving electric vehicles by the end of the year. So who cares about refined products? Well, it turns out a lot of people need refined products," says Blanch.
But could refiners be doing more?
U.S. refineries are already going gangbusters right now. They're operating above 90% capacity according to the Energy Information Administration, and expected to run at 95% for the rest of the summer.
As for turning back on idled refineries, that's not a quick fix either. It would take months to bring the refineries back online, and it would be costly for the refiners. Cinquegrana from Oil Price Information Service says that from the refiners' perspective, it doesn't make financial sense to invest in additional oil refining given the broader transition.
"You're talking about a lot of money to get these refineries that are idled up and running...when I'm being told five years from now, we hope you don't exist," Cinquegrana says.
The United States hasn't seen a major new refinery built since the 1970s. And there's a good chance it never will. Chevron CEO Mike Wirth recently stated as much in an interview with Bloomberg.
"My personal view is there will never be another refinery built in the United States," Wirth said.
source: https://www.npr.org/2022/06/26/11072...-prices-russia
tl;dr - there hasn't been any new refining facilities built in the u.s. in half a century. the pandemic caused a huge drop in refined gasoline needs, so some refiners closed or were repurposed for other needs. now with demand high, the limited supply means high prices and no likelihood of any solution ANY time soon. so get used to it.
How a massive refinery shortage is contributing to high gas prices
June 26, 20225:00 AM ET
BRITTANY CRONIN
[...]The national average price of gasoline surpassed $5 a gallon for the first time ever this month. Prices have edged down by a few cents in recent days, but remain elevated.
Exacerbating these high gas prices is a huge shortage in refining capacity in the U.S., which isn't likely to be resolved any time soon.
Refiners turn crude oil into usable products like gasoline, diesel, and jet fuel. There's just fewer refiners in the U.S. today than a couple of years ago.
Refining capacity in the U.S. is about a million barrels a day below what it was prior to the pandemic. That's left the country unable to meet its fuel needs as more people are commuting, traveling and driving as they emerge from the throes of the pandemic.
So, where did all the refineries go?
Some refineries shuttered during the pandemic-induced recession in 2020, when demand for gasoline took a nosedive. Not all of those refineries have come back online.The U.S. had five fewer refineries at the beginning of this year that at the beginning of 2020.
When the pandemic hit and demand for oil evaporated during the recession, refineries took a big financial hit when the price of gasoline plummeted. Some refiners threw in the towel. They said the numbers just didn't work, and closed up shop.
"When you're losing money on doing it, what do you do? You stop making it. And that's when you shut down refineries," says Denton Cinquegrana, chief oil analyst at Oil Price Information Service.
There were other disasters around the same time. A Philadelphia refinery, one of the largest in the country, was rocked by explosions a few months before the pandemic. In Louisiana, another refinery was wiped out by Hurricane Ida. Both have been shut down.
Oil is not where the future lies
Underpinning the decisions not to reopen refineries is the fact that the U.S. is undergoing an energy transition from fossil fuels to renewables.[...]"I think the refining executives say, well, looks like the writing's on the wall," Cinquegrana says.
In fact, some refiners have repurposed their facilities, where instead of making gasoline from oil, they're ramping up to produce renewable diesel and sustainable aviation fuel out of feed stocks like soybean oil and used cooking oil.
[...]Francisco Blanch, head of commodities research at Bank of America, points out that the country is still heavily reliant on gasoline despite those goals.
"The narrative until today was that we were going to be driving electric vehicles by the end of the year. So who cares about refined products? Well, it turns out a lot of people need refined products," says Blanch.
But could refiners be doing more?
U.S. refineries are already going gangbusters right now. They're operating above 90% capacity according to the Energy Information Administration, and expected to run at 95% for the rest of the summer.
As for turning back on idled refineries, that's not a quick fix either. It would take months to bring the refineries back online, and it would be costly for the refiners. Cinquegrana from Oil Price Information Service says that from the refiners' perspective, it doesn't make financial sense to invest in additional oil refining given the broader transition.
"You're talking about a lot of money to get these refineries that are idled up and running...when I'm being told five years from now, we hope you don't exist," Cinquegrana says.
The United States hasn't seen a major new refinery built since the 1970s. And there's a good chance it never will. Chevron CEO Mike Wirth recently stated as much in an interview with Bloomberg.
"My personal view is there will never be another refinery built in the United States," Wirth said.
source: https://www.npr.org/2022/06/26/11072...-prices-russia
#3
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"Refining capacity in the U.S. is about a million barrels a day below what it was prior to the pandemic. That's left the country unable to meet its fuel needs as more people are commuting, traveling and driving as they emerge from the throes of the pandemic."
Baloney. I have not seen any gas stations with "out of gas" signs.
This article is pretty lame, as the refineries that closed were mostly small refineries. Who is stopping oil companies to reopen any closed refineries?
Follow the money.
Baloney. I have not seen any gas stations with "out of gas" signs.
This article is pretty lame, as the refineries that closed were mostly small refineries. Who is stopping oil companies to reopen any closed refineries?
Follow the money.
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that's not exactly how markets always work. you never see 'out of gold' signs either, but price goes up and down with demand. ![Smilie](https://www.clublexus.com/forums/images/smilies/smile.gif)
well the capacity source is government data (link in article and here), although it looks like it's only up to january 2022. and npr would not exactly be considered an 'oil-friendly' news source. ![Stick Out Tongue](https://www.clublexus.com/forums/images/smilies/tongue.gif)
do you not agree with the article that there's NO real incentive at this point to expand refining capacity? and even if there was, it wouldn't expand any time soon. and with increased demand and no increase in supply, the only moving variable is price.
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This article is pretty lame, as the refineries that closed were mostly small refineries. Who is stopping oil companies to reopen any closed refineries?
Follow the money.
Follow the money.
![Stick Out Tongue](https://www.clublexus.com/forums/images/smilies/tongue.gif)
do you not agree with the article that there's NO real incentive at this point to expand refining capacity? and even if there was, it wouldn't expand any time soon. and with increased demand and no increase in supply, the only moving variable is price.
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Just simple demand and supply.
We are not producing anything in the US so we are forced to buy from foreign countries where we don’t have as much control at limiting costs.
I also believe this was done strategically to help make the move to renewable energy. Most corporations now have firm plans to be carbon neutral by 2050 or sooner. The money is therefore flowing into the renewable energy sector while oil refineries, coal, natural gas are not seeing the investment $$$ they once did.
We are not producing anything in the US so we are forced to buy from foreign countries where we don’t have as much control at limiting costs.
I also believe this was done strategically to help make the move to renewable energy. Most corporations now have firm plans to be carbon neutral by 2050 or sooner. The money is therefore flowing into the renewable energy sector while oil refineries, coal, natural gas are not seeing the investment $$$ they once did.
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#8
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Don't get me wrong, I have nothing against any company maximizing profit; that's their job. It just depends on which side of the deal you are on.
In Economics, we speak of price elasticity. Gas is an inelastic product.
It seems many think only in a demand supply point of view when in fact this is a far more complex issue. Absolutely refinery costs and production are cost components. But it simply adding more was the only way, or the major way to increase profits, companies would increase capacity. The point is, they don't have to; incentive is low as compared to other strategies.
If there were twice as many refineries or twice as much production and if people were willing to pay $6 (or whatever), why would the price be lowered? If every house on the block could sell for $1M, would you sell yours for $500K? I wouldn't.
Right now there are few viable alternatives to buying gasoline. From an Economics standpoint, that's a great position for the oil companies to be in. They have choices; they have incredible leverage.
Last edited by JeffKeryk; 06-26-22 at 10:29 AM.
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Just simple demand and supply.
We are not producing anything in the US so we are forced to buy from foreign countries where we don’t have as much control at limiting costs.
I also believe this was done strategically to help make the move to renewable energy. Most corporations now have firm plans to be carbon neutral by 2050 or sooner. The money is therefore flowing into the renewable energy sector while oil refineries, coal, natural gas are not seeing the investment $$$ they once did.
We are not producing anything in the US so we are forced to buy from foreign countries where we don’t have as much control at limiting costs.
I also believe this was done strategically to help make the move to renewable energy. Most corporations now have firm plans to be carbon neutral by 2050 or sooner. The money is therefore flowing into the renewable energy sector while oil refineries, coal, natural gas are not seeing the investment $$$ they once did.
From NASDAQ
The United States is the largest economy in the world and the U.S. is also the largest producer of oil.
#10
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Gas prices are far more complex than supply and demand.
From NASDAQ
The United States is the largest economy in the world and the U.S. is also the largest producer of oil.
From NASDAQ
The United States is the largest economy in the world and the U.S. is also the largest producer of oil.
Covid caused demand to drop drastically and oil companies had to let go of staff, shut down equipment etc.
Now we had this quick switch to back to normal demand or higher at a very rapid pace in late 2021 which caused demand to skyrocket add to that the war in Ukraine which put even more strain on supply.
The US production could increase but oil/gas companies don’t want to make long term investments to increase production due to push of renewable energy. They need funding and tax incentives to do this which the federal government will not support as we are focusing on carbon neutrality.
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oil is a globally used commodity. what is produced in the u.s. (and as pointed out, u.s. is the largest or near largest producer) isn't all used in the u.s. and even though the u.s. produces more than it consumes, the u.s. STILL imports oil. why? because it's a commodity and sold basically to the highest bidders GLOBALLY, and another big factor is logistics. i'm no expert but maybe if oil is on the east coast a buyer on the west coast won't be too interested in bidding highest compared to europeans, especially now that they've cut off a lot of their own supplies from russia. russia doesn't care though, happy to sell it to the far east and rake it in!
I also believe this was done strategically to help make the move to renewable energy. Most corporations now have firm plans to be carbon neutral by 2050 or sooner. The money is therefore flowing into the renewable energy sector while oil refineries, coal, natural gas are not seeing the investment $$$ they once did.
I do agree there is no incentive, or at least little incentive, to increase refining capacity. But assuming refining capacity is the only component (or major component) driving price at the pump is assuming other cost components are static or small contributers and assuming a constant profit margin. Price is set by the market.
In Economics, we speak of price elasticity. Gas is an inelastic product.
It seems many think only in a demand supply point of view when in fact this is a far more complex issue. Absolutely refinery costs and production are cost components. But it simply adding more was the only way, or the major way to increase profits, companies would increase capacity. The point is, they don't have to; incentive is low as compared to other strategies.
If there were twice as many refineries or twice as much production and if people were willing to pay $6 (or whatever), why would the price be lowered?
Right now there are few viable alternatives to buying gasoline. From an Economics standpoint, that's a great position for the oil companies to be in. They have choices; they have incredible leverage.
![Big Grin](https://www.clublexus.com/forums/images/smilies/biggrin.gif)
The US production could increase but oil/gas companies don’t want to make long term investments to increase production due to push of renewable energy. They need funding and tax incentives to do this which the federal government will not support as we are focusing on carbon neutrality.
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excellent article about how oil is more important for way more than just gasoline! society would literally collapse without it even if we all drove EVs.
https://reason.com/2022/05/25/civili...ement-for-now/
https://reason.com/2022/05/25/civili...ement-for-now/
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Anyone who worked at the top executive level knows this is BS. Oil companies are doing this to maximize their profit. "Big Oil has been making historic profits." They reduced refining capacity during the pandemic but decided to take it slow to increase the capacity. Why rush if it is more profitable. People are not using more gas these days with more EV & Hybrid on the road. In fact, most people drive less now. More companies are offering work from home (full-time or partial). Another reason is that big oil companies find it more profitable to sell LNG to Europe & Asia. They are putting more focus on LNG than gasoline.
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Price elasticity, from Economics:
- Price elasticity of demand is a measurement of the change in consumption of a product in relation to a change in its price.
- A good is elastic if a price change causes a substantial change in demand or supply.
- A good is inelastic if a price change does not cause demand or supply to change very much.
- The availability of a substitute for a product affects its elasticity. If there are no good substitutes and the product is necessary, demand won’t change when the price goes up, making it inelastic.
In Econ schools, gasoline (and illegal hard drugs) are used as prime examples of a highly inelastic product. We have to pay the price; we have little choice.
Gross Margin (aka Gross Profit) = Selling Price - Cost of Goods Sold.
NPR article on Oil Company Profits
What are the companies doing with record profits? Expanding refinery capacity? Stock buybacks? Again, they have incredible leverage right now.
Finally, I did not opine if this is good or bad, just doing market analysis.
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That could be a difficult question to answer...it may be more than just money. Old refineries from the 1970s, even with modifications, may not be able to meet today's pollution and safety requirements, as the EPA requirements keep getting stricter all the time. And, never mind the 1970s.....as late as the 1990s, I remember riding through Newark, NJ, just outside NYC, on the New Jersey Turnpike (Interstate 95). Refinery-plants were on both sides of the highway, belching out significant quantities of smoke and really stinking up the place. It was a hot August day, the car I was riding in as a front passenger (a Tercel that belonged to a friend of mine) did not have A/C, so we couldn't realistically even close the windows without broiling, and, of course, all that stench came right in. I never forgot that place.