U.S. Refining Is Near Capacity, Increasing the Possibility of Petroleum Products Shortages

With almost no excess capacity, gasoline, diesel, jet fuel, and home heating oil are vulnerable to supply disruptions and sky-rocketing prices

The Energy Information Administration (EIA) released its “Annual Report of Refining Capacity” earlier this month, and it is not a pretty picture.  Gulf Coast refineries are running at 98% capacity, and East Coast refineries are at 100% capacity. The nation's ability to refine crude oil into gasoline and other products fell below 18 million barrels per day (b/d) at the beginning of 2022, the lowest level since 2014. 

Source:  S&P Global and U.S. Energy Information Administration

EIA reports that the nation's operable crude refining capacity was 17.94 million b/d as of Jan. 1, down from 18.09 million b/d at the beginning of 2021.  A record high of 18.98 million b/d was reached in 2020. The 2022 projection is the lowest since 17.92 million b/d in 2014.

The sharp decline in refining capacity comes amid refinery closures in recent years and the surge in crude oil prices as retail gasoline and diesel costs hit record highs earlier this year.  Some refineries have closed in recent years due to hurricane damage, high operating costs, pandemic-related demand destruction, and the inability to permit refinery upgrades, but the war on fossil fuels and increased fuel efficiency of internal combustion engines have curbed gasoline demand over time and slowly atrophied the refining industry. 

Unfortunately, this is a problem with no solution on the horizon.  Chevron CEO Mike Wirth said earlier this month, “my personal view is there will never be another refinery built in the United States.” (Bloomberg “US may never build a new refinery even with surging gas prices, Chevron CEO says).  He went on to say that the reason was that building a new refinery takes more than a decade to plan, permit and construct, and that is not going to happen in this anti-fossil fuel environment.

That means that shortages of gasoline, diesel fuel, and other refined petroleum products are inevitable.  Simple weather events such as hurricanes in the Gulf of Mexico are enough to shut down a significant portion of the US refining capacity.  The $5 plus per gallon gasoline that caused extreme financial discomfort earlier this year may look cheap very soon.  This situation was 50 years in the making, and, unfortunately, no silver bullet is ready to rectify this problem. 

How did the U.S. get here? 

Most of the currently existing refineries were built in the 1970s.  Back then, the U.S. was importing over half of its crude oil, and it was widely believed that the U.S. had reached “peak oil,” meaning that all domestic crude oil and natural gas reserves had already been discovered. Oil and gas production would continue to decline. 

President Jimmy Carter introduced legislation that supported coal-fired electric generation to conserve America’s crude oil and natural gas reserves.   As a result, the refineries were engineered to process heavy/sour and medium/sour crude oil, which constituted the bulk of oil imported into the U.S. from OPEC countries and South America.

US oil and natural gas reserves and production limped through the 1980s until the shale revolution in the early 2000s wholly transformed the US from being a net importer of crude oil and natural gas to being a net exporter of natural gas in 2011 and a net exporter of crude oil in 2019.  It was a remarkable turn of events.

While the US is now the largest crude oil producer in the world, there was a mismatch between the type of crude oil we produce and the type of crude oil needed by many of our refineries.  The crude oil produced in the US shale fields is light/sweet crude, while much of our refining capacity was built to refine heavy/sour and medium/sour crude oil. 

The Keystone XL Pipeline offered a means to get heavy crude oil from the Canadian Oil Sands to Gulf Coast refineries.  The Canadian oil sands are the largest deposit of crude oil on the planet and are a friendly trading partner. President Obama nixed the Keystone XL Pipeline, but President Trump issued an executive permit to restart the project.

The election of Joe Biden in 2020 changed those plans again.  On his first day in office, President Biden signed an Executive Order halting the Keystone XL Pipeline construction. 

To fill the gap in crude supply, the U.S. has been importing heavy/sour crude from Russia and other countries.  But when Russia invaded Ukraine, the U.S. imposed sanctions on Russian crude, so President Biden asked the Saudis to produce more oil. The Saudis declined, although our imports of their oil have increased slightly.

Where do we go from here?

The optimistic outlook for U.S. refineries is that the efficiency of gasoline engines will continue to improve, and the US demand for gasoline will continue to decline. Also, as gasoline prices continue to rise, Americans may choose smaller fuel-efficient cars, reducing gasoline demand. 

A less likely development is that U.S. drivers increasingly move to electric vehicles as their primary mode of transportation.  Given the problems with the availability and prices of rare earth minerals, such as lithium, cobalt, and a long list of other necessary rare earth minerals, few of which are mined in the U.S., battery-powered cars are not likely to reduce the gasoline demand significantly for decades. EIA forecasts for 2050 confirm expectations for the slow growth of electric vehicles.

Ultimately, the U.S. will rely more on imported refined petroleum products or build more refineries.  Maybe a future President will invoke the Defense Production Act to get them built.