Biden seeks helps from US refiners to increase gasoline, diesel supply

Responding to record-high US gasoline and diesel prices, President Joe Biden has asked US refiners for their assistance in adding refining capacity to increase supply of gasoline and diesel.

"I understand that many factors contributed to the business decisions to reduce refinery capacity, which occurred before I took office," Biden wrote in a June 14 letter to refiners. "But at a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable."

The American Fuel and Petrochemical Manufacturers, which represents refiners and petrochemical facilities, expressed dismay at the President's letter.

"Our team at AFPM has been working closely with the administration – as recently as this week – providing industry insights and policy recommendations to address the global energy challenge," said Chet Thompson, AFPM President and CEO, on June 15.

"Any suggestion that US refiners are not doing our part to bring stability to the market is false. We would encourage the administration to look inward to better understand the role their policies and hostile rhetoric have played in the current environment," he added.

Policy-driven refining impacts

The AFPM, like other oil industry groups, puts much of the onus for the shutdown of refining capacity on US government policies, geared to phasing out petroleum use.

Chevron CEO Mike Wirth, speaking at the Bernstein 38th Annual Strategic Decisions conference on June 1, expressed his company's view, one which is echoed by other US refiners.

"We live in a world where the policy, the stated policy of the U.S. government is to reduce demand for the products that refiners produce, whether you look at the CAFE standards for fuel efficiency in vehicles, you look at the renewable fuel standard or the California low carbon fuel standard to substitute biofuels or you look at EV tax subsidies, internal combustion engine, phase-out policies," Wirth said. "At every level of the system, the policy of our government is to reduce demand."

Robert Auers, a refined fuel analyst with RBN Energy, said June 15 that US refiners had no policy encouragement from the government to act as an incentive to keep marginal plants operational.

"Margins were basically below breakeven levels for a year and there was no government financial support to incentivize them to keep capacity online for the inevitable return of demand," he said.

Refiners rush to renewables to meet the RFS

President Biden noted in his letter that US oil refiners "significantly reduced capacity" during the pandemic, as demand for gasoline, diesel and jet fell to unprecedented low levels, but refinery capacity was already declining.

"In the year before I took office, refineries in the United States reduced their capacity by more than 800,000 [b/d], leaving American refinery companies today at their lowest level of capacity in more than a half decade," Biden's letter said.

To many refiners, much of this refinery capacity rationalization can be explained by the US Environmental Protection Agency's Renewable Fuel Standard, which increases annually the volumes of renewable fuels refiners need to blend into their gasoline and diesel.

Industry estimates about 1.2 million b/d of US refining capacity has either been shuttered following the sharp drop in demand brought on by coronavirus lockdowns or converted to make renewable fuels, to meet the Environmental Protection Agency's Renewable Fuel Standard.

About 40% of this 1.2 million b/d offline hydrocarbon-based petroleum refining capacity was or is in the process of being converted to make renewable fuels like diesel, gasoline and sustainable aviation fuel.

Refiners converted plants to meet rising compliance costs of RFS renewable fuel obligations -- a policy which has been litigated and roundly criticized by many refiners as unrealistic.

As RFS compliance costs became increasing expensive, refiners converted plants and units to quickly and economically create more renewable fuel – as per the goal of the RFS. It also made them more "RIN balanced" without buying more RINs. RINs are the credits created by making more renewable fuel bought by refiners to meet their renewable volume obligation.

Platts assessments showed that the price of an ethanol RINs averaged $1.31/gal in 2021, compared with 43 cents/gal and 17 cents/gal averages in 2020 and 2019 respectively. These costs are passed through to consumers.

Administration's steps

Biden in his letter said the lack of refining capacity is "blunting the impact of the historic actions my administration has taken" to address Russia's invasion on Ukraine, which include bans on Russian petroleum.

He said the Secretary of Energy would convene a meeting on the this topic and "engage the National Petroleum Council in the coming days."

"In advance of that, I request that you provide the Secretary with an explanation of any reduction in your refining capacity since 2020 and any concrete ideas that would address the immediate inventory, price, and refining capacity issues in the coming months -- including transportation measures to get refined product to market," he wrote.

Although major US refiners have said they look forward to working with the Biden administration, refinery sources have said the process is complicated.

US spare refining capacity is limited and to restart an idled refinery is "not like turning on an oven," said one refinery source, noting it can take up to six months and be costly in terms of human and financial capital.

PBF's 160,00 b/d Paulsboro, New Jersey, running at about half capacity, is a likely candidate. But restarting the plant would increase crude demand, tightening already tight supply, as well as increasing RFS costs without any promise demand would remain at today's level.

"The one refinery that could restart – at least to some degree – would be St Croix," said RBN's Auers, referring to the US Virgin Islands refinery which was closed due to EPA violations in 2021.

"It wouldn't be full conversion (most likely), but could restart as a topping facility and help meet regional jet fuel demand and supply the 0.5% [sulfur] bunker market, which would help alleviate strains in the mid-distillate side," he said.