U.S. President Donald Trump told oil producers and refiners that he wants lower gasoline prices, immediately, at a meeting at the White House this week.
As gasoline prices remain above $4 per gallon on average across the United States and drivers are heading for the most expensive Labor Day weekend gas prices on record, President Trump urged executives from Chevron, Marathon Petroleum, Valero Energy, and PBF Energy, among others, to raise refining capacity to increase fuel availability.
The problem for the U.S. Administration two months ahead of the mid-term elections is that American refiners cannot raise output in the short term. They have been running at full capacity for the entire summer, as the U.S.-Iran war has crippled crude and fuel supply out of the Middle East and depleted global inventories after many governments, including the U.S., tapped strategic resources to ease the worst supply disruption in the history of oil markets.
Refiners do not have an immediate solution to the high prices at the pump—except, of course, a major de-escalation and a lasting deal with Iran. But none of the significant levers to lower U.S. fuel prices are in the hands of the U.S. refiners.
No Easy Fix
At the White House meeting, the executives reportedly discussed efforts to boost existing capacity and, most of all, the Renewable Fuel Standard. Some refiners criticized the blending targets as unattainable, which are driving up gasoline costs, sources with knowledge of the closed-door meeting told Bloomberg.
Moreover, U.S. refiners are not even entertaining the idea of building new refineries to ease potential similar supply crunches in the long term.
Despite record-high margins and sky-high profits over the past few months, none of the refiners plan to build new crude processing facilities. Despite the deep pockets and the blockbuster profits this year, oil companies are unwilling to sink billions of U.S. dollars into a costly new construction venture that may not even be too profitable when it starts up in about five years, as fuel demand is expected to level off and even decline.
"Nobody's going to go out and make a huge multibillion-dollar investment based on three months of record margins," Robert Campbell, an analyst at Energy Aspects in New York, told the Wall Street Journal this week.
Maximum Capacity
Even smaller capacity additions and adjustments to current refining capacity would likely take months, and even years, to materialize and make any meaningful impact on America's gasoline and diesel prices, analysts say.
"With refineries running at the closest pace to capacity in years, there's really no more room for U.S. refiners to process more oil- Venezuelan oil or anything else... refiners have been operating over 95% all summer long," Patrick De Haan, head of petroleum analysis at GasBuddy, said this week.
Due to the tight fuel markets globally and peak seasonal demand, U.S. refiners have maximized capacity utilization rates this summer.
At the end of August, the total refinery utilization rate across the U.S. was 98%, with peaks of 103.5% in the Midwest and 99.8% in the Rockies, the EIA's weekly petroleum status report for the week to August 28 showed.
U.S. gasoline and diesel exports have run at record levels in recent weeks as the global fuel market is tightening amid depleting inventories, supply bottlenecks in the Middle East and Russia, and peak summer demand.
The soaring U.S. refinery output has helped – a lot – the global market and has so far prevented it from tilting into a full-blown fuel crisis. U.S. refinery utilization has run consistently at above 95% for three consecutive months, the longest such run of high refinery runs since 2000.
The all-time high crack spread "is not a crude story. It is a refining story: Somewhere between 7 and 8 million barrels a day of global refining capacity is offline, and the gap is starting to show up at the pump," said Chris Griggs, product marketing manager for Enverus Intelligence.
One of the top U.S. refiners, Phillips 66, also sees more than an 8-million- bpd refining capacity deficit at present.
Refining fundamentals are very tight and getting tighter with the issues in Russia and the Middle East, Brian Mandell, Executive Vice President of Marketing & Commercial at Phillips 66, said on the Q2 earnings call in early August.
"We have 7 million barrels a day of refineries down in Asia and the Mid East and another 1.4 million barrels down in Russia. And the refineries, depending on the damage and the ability to get spare parts, are going to take a good long time to get back online," the executive added.
Phillips 66 expects high turnarounds in 2027 and 2028 and "likely more unplanned turnarounds in the near term as refiners push work out to take advantage of the higher margins," Mandell noted, suggesting the U.S. refiners cannot and will not run at the current high utilization levels for much longer.
U.S refiners are doing all they can to sustain as high utilization and fuel production as they can amid the global crude and fuel supply disruptions.
But they cannot do this indefinitely, while the single biggest factor forming U.S. gasoline and diesel prices is the price of crude oil, which has soared this year due to the U.S.-Iran war. WTI Crude traded at about $90 per barrel early on Thursday, compared with $67 a barrel on February 28, the day on which the U.S. and Israel launched strikes on Iran.
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