US oil refiners lay out their realities ahead of DOE meeting

Two prominent oil industry groups in a June 16 letter addressed to President Joe Biden outlined the realities faced by US refiners in response to his June 14 letter requesting they meet with the Department of Energy to find a way to increase gasoline and diesel output to bring down the price of gasoline and diesel for US consumers.

The letter from the American Fuel & Petroleum Manufacturers and American Petroleum Institute said they and their member companies told the president they "appreciated the opportunity to make contact with your administration -- as recently as this week -- both to share data and analysis on what is happening in global energy markets and to provide concrete and practicable solutions for addressing today's high price environment."

White House Press Secretary Karine Jean-Pierre told reporters June 16 at the administration's daily briefing that she was hopeful US Department of Energy head Jennifer Granholm "will sit down in the next couple days" with oil companies "to hear ideas" about help ease refined product shortages.

Biden is facing an outcry from consumers about the rising price of US energy. Most visible is the persistent increase in gasoline pump prices, with national conventional gasoline prices averaging a record high $4.91/gal so far for the week ending June 17, according to Energy Information Administration data.

Refining realities

The AFPM and API explained that refined product prices are determined on the global market, with the price of crude accounting for about 60% of the price of gasoline. Crude prices are soaring as demand for refined product returns, with Dated Brent averaging $112.23/b so far in Q2 2022, up from the $29.41/b in Q2 2021, Platts assessments show.

US refinery utilization is running near record rates, the groups pointed out, at 94% of capacity, which is expected to rise in coming days.

In the US, Platts Analytics forecast refinery outages will decline to about 2 million b/d as refiners return from planned work. This includes the ramp-up of Calcasieu's 135,000 b/d Lake Charles, Louisiana, plant, closed in 2020 in the midst of the coronavirus demand drop, which made it uneconomic to run.

However, the meat of the letter revolves around policy-driven decisions put into place that discourage expansion of the oil and gas industries, keeping refiners from making long-term business decisions based on the president's stated campaign promise "to end fossil fuel."

"EPA just set Renewable Fuel Standard (RFS) volumes at the highest levels ever, which by its nature is designed to reduce demand for refined petroleum products and incentivizes gasoline and diesel exports," the letter to the president said.

Refiners have responded to annual increases in renewable fuel blending volumes by converting plants and units to make renewable fuels. This accounts for almost half of the estimated 1 million b/d of shut US refining capacity.

However, other policies on federal and state levels are also keeping refiners from making long-term business decisions, the letter said.

This includes the recently finalized EPA light-duty vehicle standard "that incentivizes at least 17 percent electric vehicle sales by 2026" from the current 5%, the National Highway Traffic Safety Administration, new fuel economy standards that will reduce gasoline consumption by more than 200 billion gallons through 2050, and making the cost of capital more expensive through new rules from the Security and Exchange Commission.

Despite these roadblocks, US refiners have continued to invest in and increase capacity. ExxonMobil is adding 250,000 b/d of refining capacity at its Beaumont, Texas, plant to process increased production from its Permian holdings, while Valero is adding a coker at its Port Arthur, Texas, plant, which will increase capacity there by 50,000 b/d.

Preparing to meet

In his June 14 letter sent to CEOs of large refiners, which included ExxonMobil, Marathon Petroleum and Valero, the president said, "I have directed the secretary of energy to convene an emergency meeting on this topic and engage the National Petroleum Council in the coming days."

Also, Jamal Kheiry, spokesperson for Marathon Petroleum -- the largest US refiner -- said in a June 15 email, "We received the president's letter and look forward to speaking with the Biden administration,"

Some ideas already offered by companies like ExxonMobil have been met by resistance, including getting waivers for Jones Act vessels to allow them to move more cheaply between US ports.

The American Maritime Partnership said in a June 15 statement that Jones Act vessels are not a "cost driver for increased gas prices" and that it was in contact with the administration to drive home that any waivers are not justified.

The president in his letter also stated he would not hesitate to use the Defense Protection Act "to provide reliable inputs into energy production" in an effort to boost refining capacity.

While some experts agree that the current situation falls under the DPA, they question the effectiveness of invoking the act.

"The DPA is useful to reallocate assets that do exist but useless to allocate what isn't there," Eric Gordon, professor at the University of Michigan's Ross School of Business, told S&P Global Commodity Insights.