US oil refiners: flight from oil investment has raised pump prices

Drill, baby, drill? More like refine, sweetheart, refine. Last week US President Joe Biden delivered that message to bosses of several US companies that process crude oil into the gasoline and other products needed by consumers and businesses.

US petrol prices have soared to record levels as the busy summer driving season begins. The nominal problem is a post-pandemic boom in car travel exacerbated by supply disruptions from Russia’s invasion of Ukraine and tight production by remaining nations.

The particular pain Americans are feeling can also be traced to a previously obscure metric known as the “crack spread”. This is the difference between the raw material cost of oil and the traded price of petrol after it has been transformed via the refining process.

That gap has widened in 2022. The typical spread now approaches $1.50 per gallon versus just 30 cents six months ago, even as that input price has soared.

Biden’s letter was largely ceremonial. A wider spread partly reflects a retreat from refining. Throughput has shrunk from 17.3mn barrels per day in 2019 to just 16.7mn forecast for this year, according to the US Department of Energy. Capacity utilisation has hovered at above 90 per cent. Many refiners are located on the US’s Gulf of Mexico coast, whose distance from California and the north-east contributes to higher regional prices for those population centres.

Many owners have closed refineries or converted them to processing biofuels. Shareholders of listed refiners have demanded cash flow be returned via dividends and buybacks. The fear that refining assets will be left stranded in the energy transition has discouraged capital investment.

For now, that means refiners will go on earning record profits. Shareholders of two independent refiners, Valero Energy and Marathon Petroleum, have enjoyed stock price rises of at least 78 per cent in the last year. The integrated supermajors, Exxon and Chevron have also benefited.

Customers will continue to be stung at the pump. Their political representatives will be hard pressed to do anything more than write letters of complaint.

The Lex team is interested in hearing more from readers. Please tell us what you think of investment in refineries in the comments section below.