“We are going to be operating a shrunken, old and in-need-of-repair refining system a lot harder,” said Bob McNally, head of consulting firm Rapidan Energy and former senior director for international energy on the National Security Council in the George W. Bush administration. “Future presidents and administrations are going to be absolutely bedeviled by high gasoline prices.”
Republicans have pummeled the Biden administration for record high gasoline prices, blaming the jump on the president’s focus on climate change and his promises to reduce the nation’s reliance on fossil fuels. But instead of being a modern outlier, the high prices may signal a new norm that future residents of the White House of either party will have to face down.
A much-forecasted drop in demand for oil-derived transportation fuels has yet to arrive, even as the capacity for the United States to produce such fuel is falling away, McNally said in an interview.
Oil prices are the biggest component of gasoline prices, but as refinery capacity shrinks, it can create bottlenecks in fuel production that worsen price spikes when supplies are tight. Average regular gasoline prices peaked above $5 per gallon in June — and while they have fallen since then to $4.35 as of Monday, prices at the pump have fallen more slowly than the cost of oil.
Biden has moved to try to limit both economic and political fallout from the high prices, releasing a million barrels of crude a day from the nation’s Strategic Petroleum Reserve, relaxing restrictions on summer ethanol sales and calling for a temporary lifting of the 18-cent-per-gallon federal gasoline tax. The administration has also sought to take credit for the recent price dip — but analysts warn the pullback may be temporary, especially if Russian oil shipments decrease or U.S. refineries suffer unexpected outages during hurricane season.
And over the past three years, a confluence of factors has prompted more refineries to either shut down or retool to produce only renewable diesel.
Many refining companies, burdened with heavy debt, became extremely unprofitable as the pandemic sapped fuel demand for more than a year. Climate change increased both the physical hazards their plants faced and their insurance costs. Meanwhile, investors were more willing to open their wallets for alternative energy projects than upkeep on decades-old fossil fuel refineries.
In all, the 130 U.S. petroleum refineries had combined capacity to process nearly 18 million barrels a day in April, according to the Energy Information Administration, down from a peak of nearly 19 million in 2020. The higher costs of labor, steel and energy itself will pressure others to close, said Anne Slattery, senior analyst with consulting firm RSM US.
“The cost of heating the buildings, everything they use to run their refineries,” has gone up, Slattery said. “Refining capacity has really decreased significantly in the U.S. and globally. That really discourages and prohibits our ability to meet demand and contributes to volatility of prices.”
Energy Secretary Jennifer Granholm broached the issue with heads of refining companies at a meeting in June, a senior department official said in an interview.
“The conversation was focused on what did you do with that refining capacity and how are you thinking about it now given the current price environment,” the official said. “I think for some of the ones that idled [capacity] rather than shut down, I think they’re reconsidering what could come back. We’re continuing to work with folks like that.”
One option for the Energy Department is to help refinery owners convert their plants to manufacture biodiesel, the official said.
Some analysts have argued that fuel efficiency and the increasing number of electric vehicles on the roads of Europe and the United States will lower gasoline demand at a faster pace than the drop in refining capacity. Both the International Energy Agency and the U.S. Energy Information Administration have forecast a steep drop in fossil fuel demand in the United States and other developed countries, predictions that are persuading investors and even some refinery executives to put their money into renewable energy.
“This is a problem that technology is solving,” said David Goldwyn, president of energy consulting firm Goldwyn Global Strategies and a former State Department special envoy for international energy affairs in the Obama administration. “You have an internal combustion engine phase-out in Europe. You have the U.S. reaching the tipping point on electric vehicles. I think it will either fall on the refiners or government to build some [fuel] reserves for resilience purposes, but long term, no one is going to build a new refinery.”
But at least in the short term, the expected drop in gasoline demand has yet to emerge. Electric vehicle makers, beset by their own supply chain issues, haven’t been able to sell enough cars and trucks to offset a potential major shock to the U.S. gasoline market.
Even so, the reduced gasoline production is unlikely to persuade investors and refinery executives to put money into keeping their plants open, the analysts said. The growing mismatch will become a major headache for whichever political party is in power, said Mark Jones, a professor at Rice University in Houston who specializes in energy and policy.
“Even if a [Republican Florida Gov. Ron] DeSantis is elected president, the industry still sees the writing on the wall,” Jones said in an interview. “If a major hurricane hits the Gulf Coast, there simply will be gasoline shortages nationwide and a substantial spike in prices. Our capacity is getting limited.”
Twice as much refining capacity has shut down in the past three years as in the preceding 10 years. Among the biggest shutdowns was the Philadelphia Energy Solutions refinery in Philadelphia, the largest and one of the oldest on the East Coast. It suffered a major explosion in 2019 and was permanently shuttered, leaving a major hole in the region’s fuel supply.
In 2021, Phillips 66 decided to close its refinery in Belle Chasse, La., after floodwaters from Hurricane Ida breached its protective walls and caused severe damage. Scientists have pointed to that storm, which intensified rapidly as it moved through warmer-than-normal waters in the Gulf, as one that showed the impacts of climate change.
European oil giant Shell shut down its Convent refinery in Louisiana after it made a strategic shift to shrink its fossil fuel asset portfolio — and after failing to find anyone to buy it. The company is now in the process of converting it to produce renewable diesel. More recently, refining and chemicals company LyondellBasell said it will close its refinery along the Houston Ship Channel next year as it also moves away from producing fossil fuels.
The cost of running these refineries — some of which began operating a century ago — is increasing, partly due to the rising threats from climate change. About half the country’s fuel-making capacity is clustered along the Gulf Coast, where the rising air and water temperatures are making hurricanes more destructive, and shifting weather patterns are capable of bringing ice even to balmy South Texas.
“When you have refineries in operation along the coast — anywhere coastal, anywhere in a tropical zone — yes, 100 percent, insurance costs are going up for these operations,” said Kathy Baughman McLeod, senior vice president of the Atlantic Council and director of the Adrienne Arsht-Rockefeller Foundation Resilience Center.
And it’s no longer just hurricanes or weather on the Gulf Coast that refineries and their insurance companies have to worry about, said Steffen Halscheidt, global practice leader for oil and gas at Allianz Global Corporate & Specialty. Climate change is bringing new threats to plants all around the country.
“Surprisingly you have actually winter storms coming up with similar expense dimensions as proper hurricanes,” Halscheidt said in an interview.
Some refineries are also cutting back on gasoline production to meet shifting regulatory requirements. Phillips 66 and Marathon Petroleum both announced they will stop making gasoline at their California refineries and instead focus on renewable diesel. The announcements were seen as ways for the companies to cope with Gov. Gavin Newsom’s pledge to phase out fossil fuels from the state’s vehicle fleet.
The combined pressures of climate change, government policies focused on curbing emissions and forecasts for a shift to electric vehicles mean less incentive to keep the plants running, said Andy Lipow, head of consulting firm Lipow Oil Associates.
“Our refining industry is getting older. It’s going on Medicare,” Lipow said. “You’re seeing demand going down in the U.S. … You need so much money, it’s easier to pull the plug. You shut down.”
The closures are a strong reversal for an industry that not long ago had poured billions of dollars into refineries and feared it had overexpanded, said Stephen Brown, an energy consultant and former lobbyist for Tesoro Corp., a refining company that was bought by Marathon Petroleum in 2018. Bolstered by those investments, the United States in 2011 started exporting more fuel than it imported.
But now the drop in refining capacity has happened so rapidly that further shutdowns — temporary or otherwise — could cause prices to spike considerably as U.S. drivers have to compete with foreign markets for fuel.
“You add up a strong likelihood of a weather event taking off refineries on the Gulf Coast, or an earthquake in California — we’ll be at $7 bucks a gallon pretty quick,” Brown said in an interview.
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