Gasoline prices topped $4 a gallon in all 50 U.S. states in recent days for the first time ever, even though global crude oil prices have pulled back from highs reached during the early days of Russia’s invasion of Ukraine. U.S. oil prices are hovering around $115 a barrel, down from more than $120 a barrel in March.
Higher crude oil prices are contributing to the cost of gasoline, but the primary culprit behind the pain at the pump is a lack of global refining capacity, say energy executives and analysts.
Demand for gasoline and diesel has all but recovered from pandemic lows in the U.S., despite increasing Covid-19 cases around the country. The problem is that there are now fewer refineries, which convert oil into fuels and other products, than before the pandemic began.
The refining bottlenecks are prompting fears about global shortages of gasoline and diesel. The world hasn’t invested enough in maintaining or adding refineries, leading to huge gaps between the price of oil and gasoline, according to Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman.
“All mobility fuels have skyrocketed…and the gap between crude prices and these products in some cases is actually 60%," he said at a conference in Riyadh in May.
Executives and analysts say the situation could worsen because there are no plans to add significant refining capacity, and fuel demand will grow throughout the summer as drivers hit the road and more economies loosen Covid-19 restrictions.
Here is a look at what’s pushing U.S. gasoline prices to record highs.
How much are Americans driving?
Fossil fuel consumption plummeted in 2020 as global lockdowns reduced economic activity and kept drivers off the road, a pullback that extended well into 2021. But despite the persistence of the Covid-19 virus, global demand for oil and gas has essentially recovered to prepandemic levels, according to the Paris-based International Energy Agency.
In the U.S., gasoline demand peaked in 2018 at an annual average of about 9.33 million barrels a day, and fell during the pandemic to about 8 million barrels a day, according to the U.S. Energy Information Administration. The EIA expects that to increase to around 8.9 million barrels a day, on average, this year and next.
Despite the high gasoline prices, AAA forecasts that 39.2 million people will travel 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, has also soared as economic activity has picked up.
“Few could have predicted the speed with which the U.S. economy recovered from the initial shutdown," said Jonathan Wolff, an associate professor of Economics at Miami University of Ohio. “A growing economy means a growing demand for energy."
How many refineries are operational?
As fuel demand crashed during the pandemic, refiners around the world permanently closed older and less profitable plants. Around 3 million barrels a day of global refining capacity closed during the pandemic and 1 million barrels a day of that was in the U.S., according to JPMorgan Chase.
The closures were exacerbated by a punishing hurricane season in the Gulf of Mexico, home to the world’s largest petrochemical complex, that damaged some refineries there. Some companies are performing maintenance on their refineries right now, keeping even more capacity offline. The utilization rate for U.S. refineries is at about 90%, according to the EIA, at the top of the five-year range.
All of that is pushing profit margins for refining companies to record levels. The margins for producing gasoline in the East Coast are approaching $50 a barrel, up from less than $10 a barrel in the spring of 2020, according to consultant RBN Energy LLC. The margins for producing diesel in the East Coast spiked to more than $100 a barrel in late April but are now around $60 a barrel, RBN said.
“Refinery capacity rationalizations that have taken place in the last couple of years continue to contribute to the supply tightness," Valero CEO Joseph Gorder said on 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 typically leads to more investment in supply, but refiners aren’t rushing to add capacity. That’s because before the pandemic, fuel demand was plateauing in the U.S. and other parts of the world as many countries began to transition to cleaner sources of energy.
When the pandemic took hold, companies took the opportunity to shut down older plants in the world’s richest countries, including the U.S., Australia and Europe. Despite a resurgence in fuel demand, refining companies’ views on demand’s long-term trajectory haven't changed. A refinery can take 20 years to recoup the initial investment, making the current business case for a new plant dim.
When Hurricane Ida damaged Phillips 66’s Alliance refinery in Louisiana, it permanently shut the plant instead of investing more than $1 billion in repairs. By the end of 2023, as much as an additional 1.69 million barrels of U.S. refining capacity is expected to close, according to consulting firm Turner, Mason & Co.
Some companies are converting refineries into plants that can produce biofuels and other greener products. Phillips 66 said in May that it will spend $850 million to convert its San Francisco Refinery in Rodeo, Calif., into a renewable fuels facility.
How is Russia’s invasion of Ukraine contributing to the situation?
The war in Ukraine is exacerbating a fuel market that has little to no cushion. Western sanctions have forced Russian refiners to shut down 800,000 barrels a day of capacity and potentially as much as 1.4 million barrels a day in May as product flows to Europe have stopped, according to JPMorgan Chase.
That has left European consumers to look to the U.S., Asia and the Middle East for replacements, further drawing on already tight supplies. Refiners on the East Coast have ramped up fuel exports to Europe, depleting domestic stockpiles, especially of diesel.
Earlier this month, U.S. diesel fuel inventories fell to their lowest levels in 17 years, according to JPMorgan Chase, drawing at a time of year when stocks are normally flat or building. On the East Coast, storage levels of diesel fell in May to their lowest level in the 40-year history of EIA measurements, the bank said.
Overall, U.S. inventories of gasoline are 18.8 million barrels, or 8%, below the average for this time of year, according to the EIA.
Is relief at the pump coming anytime soon?
Many energy analysts and executives believe high fuel prices will persist for the rest of the year and may even get worse.
The end of 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 draws on stockpiles. But Covid-19 lockdowns in China are keeping a lid on global fuel demand, and if those lift, there will be even more competition for tight fuel supplies.
Meanwhile, more Russian refineries may close as the war continues, and the European Union’s proposed ban on Russian oil would likely cause gasoline prices to increase further, say analysts. This year’s Atlantic hurricane season is forecast to be more active than usual, and if a significant amount of refining capacity were forced offline, similar to past seasons, the U.S. could actually run out of certain fuels, JPMorgan Chase said.
“Should China emerge from its Covid constraints, demand could come back ferociously and into a market that is already tight," said Peter McNally, an analyst at Third Bridge. “U.S. refinery utilization is approaching its limits and any disruption would make the U.S. more dependent on fuel imports, potentially leading to higher prices."
This story has been published from a wire agency feed without modifications to the text
