The U.S. has the most complex and efficient refining industry in the world.
It also has less refining capacity than it used to, with 1.1 million fewer barrels of daily refining capacity compared to the start of 2020.
At least seven facilities have shuttered, closed units or begun to transition away from petroleum processing.
Despite the focus on energy transition, energy security still requires a strong petroleum refining sector, so it is critical to understand what the recent loss of U.S. and global refining capacity signifies, and the role government can play to support or undermine the competitiveness of U.S. refineries.
Total refining capacity, the maximum volume of crude oil that refineries can process, and the location of that capacity, have an impact on the price and availability of gasoline, diesel and other petroleum fuels.
When it comes to gasoline and diesel prices, global supply and demand for crude oil tends to be the focus since crude is the primary feedstock for both fuels. Refining capacity is relevant too. Capacity matters because crude oil wouldn’t be worth a dime if refineries didn’t exist to process crude into fuels people can use. Similar to crude oil, if the balance is off between refining capacity and global demand for fuel, overall fuel supplies would be constrained, resulting in upward pressure on prices.
There are several factors responsible for loss of domestic refining capacity: political and financial pressure to move away from fossil fuels, regulatory compliance costs and facility-level economics all affect these decisions. The sharp decline in fuel demand at the start of the pandemic sped up the timeline for closures and transitions, but COVID-19 is not the sole cause.
Once capacity is shuttered it cannot be restored with the simple flip of a switch. Much of the refining capacity lost in the U.S. is either being dismantled or in the process of being transitioned to renewable fuel production. Reopening a refinery, which is very different from restarting after a storm, is a massive undertaking that requires lead
time to inspect machinery, attain necessary operating permits and recruit and train operating staff. This process can take up to a year and needs to make long-term business sense.
When new refinery builds and capacity expansions come online this year and next in Asia, Africa, the Middle East and in the U.S., all capacity lost globally since 2020 will be made up. While some expansion projects, which total close to 350,000 bpd, are underway in the U.S. Gulf Coast region, a full recovery of the capacity lost here at home is not expected.
Even with less capacity, American refiners remain focused on maximizing fuel production at every facility, ensuring that the available capacity is running efficiently and cost effectively to supply U.S. consumers and meet global energy needs.
To maintain and strengthen U.S. energy security and its standing as the world’s refining leader, especially in the midst of a rebalancing global fuel market, policy is key. Refiners must always be mindful
of refining capacity, how it stacks up with domestic and global demand and where it’s located relative to U.S. population centers.
At the same time, refiners also have to be judicious about reforming and even stopping policies that would put critical refining capacity in jeopardy — policies like the Renewable Fuel Standard, which adds billions to refinery operating costs, and export restrictions that would cause bottlenecks and production cuts at Gulf Coast refineries and higher prices for Americans elsewhere.
Finally, infrastructure and policy go hand in hand. Given where capacity has been lost in the U.S. geographically, policymakers need to focus on better, more affordable transportation infrastructure and policies to streamline the movement of fuel products to every corner of the country where they’re needed. The new Congress will undoubtedly schedule “Infrastructure Week” early, and this must be a focal point.
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