President Donald Trump is striving to reverse the multi-year decline in the number of oil refineries in the US, viewing it as key to lowering fuel prices. He recently convened oil company executives at the White House to advance this initiative.
White House representative Taylor Rogers told CNN that 'President Trump and his entire energy team will continue to support the resumption of operations at closed refineries, the expansion of existing plant capacities, and the construction of new ones to lower prices and strengthen national security.'
However, experts note that increasing the number of American refineries will not lower prices in the near term and is unlikely to do so in the long term. In America, a new refinery of significant capacity has not been built since 1977, and in 1982, there were roughly twice as many plants operating as there are now. Even if a construction boom started tomorrow, it would take years to produce the gasoline and diesel fuel needed to mitigate current price issues.
American oil companies are not rushing to build refineries. Despite the industry's high profitability, they recognize that current energy market disruptions are temporary. The surge in gasoline prices caused by the wars in Iran and Ukraine will not last long enough to justify the multi-year costs and billions of dollars in investment required to build new refineries.
John Aueres, Director of Refining Products Marketing at the analytical firm Novi Labs, noted that plans for large expansion projects are not very significant because the Strait of Hormuz is expected to reopen in four to five years, and Russian refineries will return to normal operation.
The main reason for the rise in fuel prices this year is limited global refining capacity, not just the situation in the US, which is even more significant than the disruption of crude oil supplies from the Strait of Hormuz due to the war in Iran. Darren Wood, CEO of ExxonMobil, told CNBC this summer that there was previously a surplus (of refining) supply, but now there is a refining constraint, and fuel prices are determined by the supply and demand for refined products, not crude oil.
Refineries in the Middle East and Russia have suffered from military attacks. Russia, which was a major fuel exporter for a long time, is now a net importer due to domestic fuel shortages, and facilities in the Persian Gulf cannot export as much product due to ongoing shipping disruptions.
Aueres emphasized that the problem lies in the loss of 2 million barrels per day of supplies to world markets, lost between Russia and the Middle East, which is a huge volume in an already tight market.
Despite the rise in oil prices this year, recently exceeding $100 per barrel, high prices for end products have increased refiners' margins to record levels, even with higher raw material costs. Independent oil analyst Tom Kloza, advisor to Gulf Oil, reported that American refineries are currently earning about $100 per barrel of diesel fuel and $40 to $50 per barrel of gasoline.
Thanks to this incredible profitability, according to data from the U.S. Energy Information Administration, American refineries are operating at nearly 100% capacity this year. Wood from Exxon previously told investors that the company had postponed maintenance to maintain output and profitability, earning $14.5 billion in profit in the fourth quarter, more than double the same quarter last year. However, as Wood warned, this level of utilization cannot be sustained in the long term, and temporary shutdowns for maintenance are inevitable, which will lead to reduced supply and rising prices.
Despite the sharp decline in the number of refineries over the past 45 years, the US has managed to provide all necessary fuel with the remaining plants. Aueres explained that many closed plants were small and less competitive. Furthermore, technological improvements, increased efficiency, and the expansion of existing refineries have led to the US's total capacity effectively growing over time. According to the EIA, output grew by 16% from 1999 to a record 18.6 million barrels per day in 2019, and has since fallen by only 3%. Meanwhile, Americans consume less gasoline due to better fuel efficiency, the increase in electric vehicles, and the rise of remote work.
Gasoline prices in the US rose sharply after the start of the war in Iran at the end of February and remain high, outpacing the rise in crude oil prices. According to AAA, the average national price for gasoline on Saturday was $4.31 per gallon, the highest price for September. Diesel fuel prices exceeded the $6 per gallon mark for the first time, and aviation fuel reached its highest level since April.
Nevertheless, expecting a quick change in the situation through an increase in the number of American refineries is unwarranted. Firstly, significantly expanding existing refineries requires at least three years, and a new plant takes even longer. Aueres added that even if a plant is designed and ready for environmental inspection, 'it will take another four to five years before it starts producing.' Furthermore, for the investment to pay off, the additional capacity must operate for decades, making such long-term investments risky due to uncertainty in future regulations and demand in the US.
Kloza predicts that, excluding the pandemic, 'summer gasoline demand this summer will likely be the lowest for the summer period since 2001.' He also believes that 'North America is the best continent for running refineries right now and probably for the next five to ten years.' This is why oil companies are more interested in using current superprofits for investments in oil exploration or pipelines, which offer a more immediate return, or for returning money to shareholders.
