Industry Financial Disclosures Show U.S. Refineries Running At Full Capacity, Despite Biden Claims

With ten days to go before the midterm elections, and gas prices heading back up, some anxious politicians are desperately trying to point fingers at anyone but themselves to explain why consumers are paying more at the pump. That includes at oil and gas companies. So, with third quarter earnings results out, these politicians are already using the topline numbers for political fodder.

Third quarter profits were high across the board – similar to last quarter’s earnings – but an actual look at energy companies’ earnings reveals some interesting new dynamics at play in the politically contentious global energy market.

So, what do they show?

Refineries are operating at maximum capacity – but refining margins are down.

Earlier this year, energy companies’ high profits were primarily driven by high refining margins, resulting in criticism from the Biden Administration and, more recently, California Governor Gavin Newsom. President Biden urged companies to “use those record-breaking profits to increase production and refining.” As it turns out, oil majors are doing just that.

Refinery throughput continues to push record highs. ExxonMobil’s earnings call detailed how the company invested in new refinery capacity while ensuring that currently operable refineries worked overtime to meet demand for gasoline and other refined products:

“We boosted overall refinery throughput to its highest quarterly level since 2008, responding to tight market conditions, and we continued to make progress on the Beaumont refinery expansion, which will increase capacity by about 250,000 barrels per day in the first quarter of 2023.” (emphasis added)

However, high refinery utilization in the third quarter did not necessarily translate to high margins. According to British oil major Shell’s third quarter earnings presentation, “a recovery in global product supply to meet demand” contributed to significantly lower refining margins for the company relative to the previous two quarters.

Similar factors impacted ExxonMobil’s refining business in the third quarter:

“Higher refinery runs and flat demand for gasoline in the U.S. resulted in refining margins declining from the second quarter.”

Planned and unplanned refinery maintenance activities were also major factors contributing to fluctuations in companies’ profits and in gas prices across the country, particularly in the “gasoline island” of California.

While Chevron’s refined product sales increased by five percent relative to the third quarter of the previous year, Chevron’s domestic refinery crude oil input decreased relative to the same period due to refinery maintenance:

“Refinery crude oil input in third quarter 2022 decreased 13 percent to 779,000 barrels per day from the year-ago period, primarily due to planned turnarounds.”

Natural gas prices were the main driver of high profits.

Last quarter, oil majors’ profits were primarily driven by elevated crude oil prices and refining margins. But in the latter half of the summer and early fall, crude oil prices decreased from peak highs, and gasoline prices fell in tandem. This decrease was mainly driven by recession fears, decreased demand, and increased supply due to new production.

This quarter, natural gas prices, production, and export activity surged to meet the acute need for energy around the word, particularly in European countries. ExxonMobil’s third quarter earnings presentation shows that average natural gas prices increased relative to the prior quarter, hitting historic ten-year highs:

“Natural gas prices rose to record levels in the third quarter, reflecting concerns in Europe about the withdrawal of Russian supply as well as efforts to build inventory ahead of winter. While natural gas prices recently moderated, they remain well above the ten-year historical range.”

High profits derived from natural gas production and sale were even more pronounced for European energy companies. TotalEnergies and Equinor each posted record third-quarter profits driven primarily by high European gas prices.

Domestic production continues to ramp up, especially in the Permian.

U.S.-headquartered oil majors’ domestic oil production in the third quarter accelerated significantly following calls from the Biden administration to ramp up production and help bring down the cost of fuel for consumers.

In the third quarter, Chevron’s production in the Permian hit a new quarterly record and increased by twelve percent from last year’s third quarter results. The company’s unconventional oil production in the oil-rich basin totaled over 700,000 barrels of oil equivalent per day. Chevron CEO Mike Wirth said:

“We’re increasing investments and growing energy supplies, with our Permian production reaching another quarterly record.”

Chevron’s total domestic production increased by four percent compared to the same period last year.

In the third quarter, ExxonMobil continued to double down on high-performing domestic oil and natural gas regions and sold its assets in lower-producing regions, like California. As Reuters reports:

“Exxon said its U.S. oil and gas production from the Permian Basin was near 560,000 barrels of oil and gas per day (boed), a record. Production for the year will increase about 20% over 2021.”

Companies warn against counterproductive policies.

Amid unprecedented market uncertainty, oil executives cautioned policymakers in the United States and European Union against implementing policies that disincentive investment in production and refining.

In an interview with Bloomberg Television, Chevron’s Wirth argued against a windfall profit tax, which, when it was implemented in the United States in the 1980s, resulted in decreased domestic production and higher reliance on energy imports. Wirth emphasized the cyclical nature of the industry:

“There are hard times, as we saw just two years ago where we had enormous losses. Good times don’t last just like the difficult times don’t last. We have to invest through those cycles and its important we do to meet the growing demand for energy.”

The need to “invest through” economic cycles was a focal point of ExxonMobil’s third quarter earnings presentation as well. ExxonMobil CEO Darren Woods pointed out that the company’s successful quarter was not circumstantial, but the result of years of smart investment and effective cost management. Woods said:

“Where others pulled back in the face of uncertainty and a historic slowdown, retreating and retrenching, this company moved forward, continuing to invest and build to help meet the demand we see today, and position the company for long-term success in each of our businesses.”

This kind of long-term investment approach requires a predictable and investment-friendly tax regime. ExxonMobil’s chief executive pushed back on short-sighted windfall profit tax proposals, particularly those suggested in European countries where both oil and natural gas production and refinery capacity has declined severely in the past five years. Woods cautioned that such tax plans would exacerbate the trend of refinery closures:

“[Windfall tax proposals] have the potential to further jeopardize the ability of struggling European refineries to compete in a global market and reduce Europe’s prospects of improving energy security.”

Bottom Line: Energy producers have heeded the call from the Biden administration to increase domestic oil and natural gas production in the United States, although the White House continues to push unfounded price gouging allegations at the same time. For months, experts have pointed out that oil companies’ high profits are the result of elevated commodity prices and high demand, not market manipulation. That principle holds for recently released third quarter earnings results, although this quarter’s profits are overwhelmingly driven by the price of natural gas rather than the price of crude oil. Energy executives continue to advocate for policies that allow companies to do what the administration is asking companies to do – to produce more domestic oil and natural gas to address the global energy crisis and bring down the price at the pump.

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