Here’s What You Should Know Ahead of the Granholm Meeting On Gasoline Prices
Energy Secretary Jennifer Granholm will meet with energy leaders today to discuss solutions to lower record high gasoline prices. The meeting was prompted after President Biden sent a letter last week to companies where he blundered over refinery capacity and the media began calling out top Democrats over their mixed messages.
Ahead of the meeting, here’s what you should know:
- Refineries are already at near-peak utilization
In his letter, Biden wrote, “Companies must take immediate actions to increase the supply of gasoline, diesel, and other refined product.”
But that ignores the key fact that refinery utilization is already nearing peak levels. The Energy Information Administration recently wrote:
“In response to these high prices, we expect that refinery utilization will reach a monthly average level of 96 percent twice this summer, near the upper limits of what refiners can consistently maintain. We expect refinery utilization to average 96 percent in June, 94 percent in July, and 96 percent in August.” (emphasis added)
CNBC reported on these nearly maxed out refining levels:
“Refiners can’t just ramp up output, and utilization rates are already above 90 percent. … Still, there is no easy solution. John Kilduff, partner at Again Capital, said refiners are working at historically high level. ‘There is nothing left to ramp up.’” (emphasis added)
- COVID and market forces slimmed down refining capacity
A major reason that refining utilization – despite being near peak levels – can’t keep up with demand is because the sector significantly slimmed down capacity.
At the start of 2020, the United States had the largest refining industry in the world, with 135 operable petroleum refineries and total refining capacity of 19 million barrels per day. But that capacity has scaled back in the past year-and-half, due to pandemic-related demand interruptions, natural disasters, and other operational issues.
Refineries also closed in response to policy incentives. In 2020, Shell closed a major refinery in Louisiana in accordance with the company’s low-carbon strategy. More than half of the refining capacity lost since 2020 is being repurposed for renewable fuel production or dismantled and cannot be re-opened.
While U.S. refinery capacity is at an eight-year low, refinery utilization is at peak levels. In other words, operational U.S. refineries are refining petroleum into gasoline with record efficiency. Refiners plan to max out utilization in response to price signals – in other words, the market is responding as it should.
- Refining is a long-term investment – not a “near-term” play
While the two previous points completely undercut Biden’s argument that energy companies aren’t doing their job to supply the American people with gasoline, his call for “near-term solutions” for refining capacity are also off the mark.
Increasing refinery capacity requires large amounts of capital, long-term investment plans, and a stable regulatory environment. This is a well-established concept as the Washington Post recently reported:
“Building and upgrading the mammoth structures is a messy, expensive undertaking that can drag on longer than a decade, strain the finances of even the biggest fossil fuel giants and run the risk of getting abandoned before that investment is returned.”
It means that even if a company were to start a new refinery expansion today, consumers would not see any lasting effect on prices until years later.
John Kemp, a senior energy markets analyst for Reuters, reports that due to the large amounts of capital involved in refinery expansions and the long lead times for refinery planning and construction, “capacity for 2022 and 2023 is largely fixed and nearly all being used already leaving little scope to increase output in the short to medium term.”
- Major oil companies are already boosting production and refining
Despite all of these challenges, major oil companies are doing all they can to increase production and refining.
In response to Biden’s letter to refiners, ExxonMobil highlighted the efforts it has taken to increase refining capacity, even during the market downturn when the company took on billions of dollars in losses:
“Specific to refining capacity in the U.S., we’ve been investing through the downturn to increase refining capacity to process U.S. light crude by about 250,000 barrels per day – the equivalent of adding a new medium-sized refinery. We kept investing even during the pandemic, when we lost more than $20 billion and had to borrow more than $30 billion to maintain investment to increase capacity to be ready for post-pandemic demand.”
Chevron’s Chief Executive, Michael Wirth, took a stronger tone in his response to Biden’s letter. Wirth pointed out that in 2021, Chevron produced the highest volume of oil and gas in the history of the company. In the first quarter of 2022, Chevron’s US refinery output grew year-over-year to an average of 915,000 barrels per day. Wirth also notes that in response to the current economic challenges, Chevron has increased its capital expenditures year-over-year by over 50 percent, but:
“Notwithstanding these efforts, your Administration has largely sought to criticize, and at times vilify, our industry. These actions are not beneficial to meeting the challenges we face and are not what the American people deserve.”
Marathon Petroleum, the largest U.S. refiner, also received Biden’s letter. The company is near completion of its Galveston STAR project, a refinery expansion that could add up to 40,000 barrels per day of crude capacity. Marathon Petroleum invested over $1 billion in the STAR project, which is expected to come online in 2023. A spokesperson for Marathon Petroleum said that the company “looks forward to speaking with the Biden administration.”
- Biden’s mixed messages are undermining investment
Even mainstream media outlets are beginning to tire of playing along with the administration’s blame game. On CNN, host John Berman pointed out the blatant contradiction in the administration’s messaging during his interview with Granholm.
Berman: “Five years from now, 10 years from now, are you telling me you want them drilling for more oil? You want refineries putting out more gasoline in five years or 10 years?”
Granholm: “What we’re saying is today we need that supply increased. Of course, in five or 10 years, actually in the immediate, we are also pressing on the accelerator, if you will, to move toward clean energy so we don’t have to be under the thumb of petro dictators like [Vladimir] Putin.”
Berman: “But that’s the problem for these companies. These companies are saying, you know, ‘you’re asking me to do more now, invest more now, when in fact five or 10 years from now we don’t think that demand will there be, and the administration doesn’t even necessarily want it to be there.’” (emphasis added)
And MSNBC opinion columnist Noah Rothman recently identified several, immediate steps the Biden administration could take to ease pressure on American drivers:
“The administration so far has not abandoned its objection to providing drilling leases in the Artic National Wildlife Refuge. It won’t rescind a day one executive order barring federal agencies from providing fossil fuel producers with ‘subsidies.’ It won’t allow three already approved offshore oil leases to move forward, taking millions of acres of exploitable deposits off the table.”
Rothman points out an obvious reality – that the Biden administration has delayed and canceled new oil and natural gas leases on federal lands while simultaneously denying that his administration is limiting production. Just last week, the Biden administration delayed oil and gas lease sales in New Mexico, Colorado, and Wyoming. Yet, somehow in his Wednesday remarks on gas prices, Biden claimed that “Republicans falsely claim that I’m blocking production on federal lands, but again, that’s nonsense.”
Whether the administration is discussing pipelines, new onshore leases, offshore leasing plans, or refineries, the mixed messages are the same – and they discourage growth and investment, even when the need for more oil is abundantly clear.