Gasoline prices have topped $4 a gallon in all 50 US states in recent days for the first time ever, even as global crude oil prices have retreated from highs reached at the start of Russia’s invasion of the US. ‘Ukraine. US oil prices are hovering around $115 a barrel, down from over $120 a barrel in March.
Rising crude oil prices are contributing to the cost of gasoline, but the biggest culprit in the pain at the pump is a lack of global refining capacity, energy executives and analysts say.
Gasoline and diesel demand has all but recovered from pandemic lows in the United States, despite rising Covid-19 cases nationwide. The problem is that there are now fewer refineries, which turn oil into fuels and other products, than before the pandemic began.
Refining bottlenecks raise fears of global gasoline and diesel shortages. The world has not invested enough in maintaining or adding refineries, leading to huge discrepancies between the price of oil and gasoline, according to Saudi Energy Minister Prince Abdulaziz bin Salman.
“All mobility fuels have skyrocketed…and the price gap between crude and these products is in some cases 60%,” he told a conference in Riyadh in May.
Executives and analysts say the situation could worsen as there are no plans to add significant refining capacity, and fuel demand will increase throughout the summer as drivers hit the road and that more savings will ease Covid-19 restrictions.
Here’s a look at what’s driving U.S. gasoline prices to record highs.
How much do Americans drive?
Fossil fuel consumption fell in 2020 as global shutdowns reduced economic activity and kept drivers off the road, a decline that extended into 2021. But despite the persistence of the Covid-19 virus, the Global demand for oil and gas has essentially recovered to pre-pandemic levels, according to the Paris-based International Energy Agency.
In the United States, gasoline demand peaked in 2018 at an annual average of around 9.33 million barrels per day, and fell during the pandemic to around 8 million barrels per day, according to US Energy Information. Administration. The EIA expects that to rise to around 8.9 million barrels per day, on average, this year and next.
Despite high gas prices, the AAA predicts 39.2 million people will drive 50 miles or more from home over Memorial Day weekend, up 8.3% from 2021 levels .
Demand for diesel, the primary fuel for the trucking industry and other industrial users, also soared as economic activity picked up.
“Few people could have predicted how quickly the US economy recovered from the initial shutdown,” said Jonathan Wolff, associate professor of economics at the University of Miami in Ohio. “A growing economy means a growing demand for energy.”
How many refineries are operational?
As fuel demand slumps during the pandemic, refiners around the world have shut down older, less profitable plants for good. About 3 million barrels per day of global refining capacity shut down during the pandemic and 1 million barrels per day in the United States, according to JPMorgan Chase.
The shutdowns were exacerbated by a grueling hurricane season in the Gulf of Mexico, home to the world’s largest petrochemical complex, which damaged some refineries. Some companies are currently performing maintenance on their refineries, keeping even more capacity offline. US refinery utilization is around 90%, according to the EIA, at the high end of the five-year range.
All of this is pushing profit margins for refiners to record highs. Gasoline production margins on the East Coast are approaching $50 a barrel, from less than $10 a barrel in the spring of 2020, according to consultant RBN Energy LLC. East Coast diesel production margins soared to more than $100 a barrel in late April, but are now around $60 a barrel, RBN said.
“Refining capacity rationalizations that have taken place over the past two years continue to contribute to tighter supply,” Valero CEO Joseph Gorder said in a call with analysts in April. Valero, the second-largest U.S. refiner, reported its best margins since 2015 in the first quarter.
Why are refineries closing if they are so profitable right now?
Increased demand generally leads to more investment in supply, but refiners are not rushing to add capacity. Indeed, before the pandemic, fuel demand plateaued in the United States and other parts of the world as many countries began to switch to cleaner energy sources.
As the pandemic took hold, companies took the opportunity to shut down older factories in the world’s wealthiest countries, including the United States, Australia and Europe. Despite a resurgence in fuel demand, refiners’ views on the long-term trajectory of demand have not changed. A refinery can take 20 years to recoup the initial investment, which weakens the current business case for a new plant.
When Hurricane Ida damaged the Alliance refinery at Phillips 66 in Louisiana, it permanently closed the plant instead of investing over a billion dollars in repairs. By the end of 2023, up to 1.69 million additional barrels of U.S. refining capacity are expected to close, according to consulting firm Turner, Mason & Co.
Some companies are converting refineries into factories capable of producing biofuels and other greener products. Phillips 66 said in May it would spend $850 million to convert its San Francisco refinery in Rodeo, Calif., to a renewable fuels facility.
How does Russia’s invasion of Ukraine contribute to the situation?
The war in Ukraine is exacerbating a fuel market that has little or no cushion. Western sanctions forced Russian refiners to shut down 800,000 barrels per day of capacity and potentially up to 1.4 million barrels per day in May as product flows to Europe came to a halt, according to JPMorgan Chase .
This has left European consumers looking to the United States, Asia and the Middle East for replacements, drawing more on already tight supplies. East Coast refiners increased their fuel exports to Europe, depleting domestic stocks, particularly of diesel.
Earlier this month, U.S. diesel fuel inventories fell to their lowest level in 17 years, according to JPMorgan Chase, drawing at a time of year when inventories are normally flat or under construction. On the East Coast, diesel storage levels fell in May to their lowest level in the 40-year history of EIA measurements, the bank said.
Overall, U.S. gasoline inventories are 18.8 million barrels, or 8%, below average for this time of year, according to the EIA.
Is relief at the pump coming soon?
Many energy industry analysts and executives believe that high fuel prices will persist for the rest of the year and could even worsen.
The end of the spring maintenance season for fuel makers could add an additional 2.5 million barrels of capacity as plants come back online, according to JPMorgan Chase, potentially preventing further inventory drawdowns. But the Covid-19 lockdowns in China are keeping a ceiling on global fuel demand, and if these lift there will be even more competition for tight fuel supplies.
Meanwhile, more Russian refineries could close as the war continues, and the European Union’s proposed ban on Russian oil would likely drive gasoline prices up again, analysts said. This year’s Atlantic hurricane season is expected to be busier than usual, and if a significant amount of refining capacity is taken offline, like in previous seasons, the United States could actually run out of some fuels. , said JPMorgan Chase.
“If China emerges from its Covid constraints, demand could come back fiercely and in an already tight market,” said Third Bridge analyst Peter McNally. “U.S. refinery utilization is nearing its limits and any disruption would make the U.S. more dependent on fuel imports, which could lead to higher prices.”
This story was published from a news agency feed with no text edits