As millions of families start to hit the road over the coming weeks for summer vacations, they’re going to face the harsh reality of record-high gas prices. President Joe Biden is working to end both the pandemic-induced supply chain disruptions and the Russian invasion of Ukraine. But there is more we can do about a key factor behind the surge in gas prices: the shortage of oil refining capacity.
According to the U.S. Energy Information Administration, the price of oil accounts for about 54% of the cost of gasoline; federal and state taxes account for about 16%; distribution and marketing for about 15%; and refining for about 15%. The price of oil is a significant driver of rising gasoline prices, as oil production declined due to lack of demand during the COVID-19 pandemic, and the war in Ukraine has removed another 3 to 4 million barrels per day from the global market.
However, there is another factor driving the skyrocketing cost of fuel: the cost of refining. Oil refineries turn crude oil into gasoline, diesel, and jet fuel, and without enough oil refining capacity, it doesn’t matter how much crude oil is pumped out of the ground.
The refineries will act as a bottleneck, limiting the supply of gasoline and keeping prices high.
Just as crude oil production declined during the pandemic, demand for refineries also fell drastically — leading many companies to shut down their facilities rather than continue operating at a loss. The pandemic, combined with the shutdown of Russian oil refineries, has resulted in a global refining capacity shortage of around 3.2 million barrels per day compared to pre-pandemic levels.
In the U.S. alone, we are running about 1 million barrels per day below pre-pandemic capacity.
Ironically, this shortage of refining capacity has made oil refining a very profitable business. In fact, the profit margin between crude oil and refined fuels has reached a near-record high. But this hasn’t led to new refineries. In fact, numerous companies have permanently decommissioned the refineries they shut during the pandemic.
These “business decisions” are contributing to record high gas prices and even higher diesel prices. Even worse, there is a real possibility of fuel shortages if demand continues to increase while global refining capacity remains 3.2 million barrels per day below pre-pandemic levels.
That’s why I have called on President Biden to work with Congress to provide technical and financial assistance to restart existing American oil refineries for just long enough to reduce gas prices. Unlike drilling new oil wells, restarting idle refineries could have an impact relatively quickly and without a long-term commitment to more oil production.
Let’s face it: We need to transition our economy away from fossil fuels like oil that cause climate change and leave us subject to volatile price spikes and shortages. But moving to a greener, cleaner economy while ensuring energy remains reliable and cheap demands a smooth shift through the use of bridge investments, such as restarting existing refineries.
President Biden and Congress should embrace all the tools at our disposal to lessen the impact of skyrocketing fuel costs on American families. Releasing fuel from our Strategic Petroleum Reserve, as the president has done, is one part of the answer. Increasing our refining capacity by reopening existing plants is another.
It’s in the interest of all Americans to move toward a green energy economy, so that future pandemics and foreign wars won’t send our fuel prices soaring. In the meantime, as millions of families plan their travel for this summer, we can take some sensible, short-term steps to keep their vacation dreams within reach.
U.S. Rep. Raja Krishnamoorthi, D-Ill., chairs the House Oversight Subcommittee on Consumer and Economic Policy.
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