Why Is The U.S. Losing Oil Refining Capacity?

One of the less reported factors behind the ongoing diesel shortage is the loss of US refinery capacity since the start of the Covid-19 pandemic. Today I will discuss the factors that led to this loss.

According to the Energy Information Administration (EIA), at the start of the pandemic US refiners had 19.0 million barrels per day (BPD) of active refining capacity (The source). This was the highest number ever reported by the EIA.

By December 2021, that number had fallen to 17.9 million BPD – a loss of 1.1 million BPD of capacity in less than two years.

Here is what many need help understanding about purification. It’s a boom-and-bust industry, and these cleaners don’t have crystal balls. It is widely reported that they make huge profits, but often endure huge losses.

US energy policy is clear about the goal of eliminating fossil fuels. If you are a refiner predicting billions in losses – and needing a major investment to keep the refinery operating safely and in compliance – you may decide to close.

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There are two excellent sources of information on which refineries are closed, and why they are closed. The first is the EIA.

During the summer, the EIA reported US refinery capacity declined in 2021 for the second year in a rowwhere they discussed a major shutdown in 2021. They also showed this excellent diagram of how the refining capacity has evolved in recent years:

But I stumbled upon a more detailed look recently. In a Twitter thread, Laura Sanicola, an oil and energy reporter for Reuters, highlighted the refinery shutdowns from the start of the pandemic until June 2022:

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He reports on the closing of refineries, but the content is consistent. Many refineries have been closed due to loss of demand due to the Covid-19 pandemic.

But, don’t these companies make billions of dollars? Isn’t that an argument for keeping these refineries open? There are two points to be made in that discussion.

First, it is possible to make billions of dollars as a company, but lose money continuously in the refinery. We’ve seen this happen a lot with East Coast refiners who can’t afford the cheap oil from the US shale boom. They had to continue to get crude oil from international markets, and that put them at a competitive disadvantage.

Second, current refining revenues are a reflection of time. Today, US demand for petroleum has recovered significantly. In fact, demand for distillate has returned to pre-pandemic levels.

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But, these companies are predicting the future. They looked at the long-term forecast of demand for petroleum products. That forecast shows a decline in fuel demand over time. Thus, they do not want to invest billions of dollars that may take a decade or more to pay off.

Imagine that you run a chain of stores. Overall, your company is highly profitable, but you have stores that are often unprofitable. After all, those stores are outdated, the demand outlook in these areas is weak, and it will cost a lot of money to upgrade them. Maybe you would close those places.

That, in short, is because we’ve lost the ability to upgrade the U.S. It’s going to take some changes in our energy policy to fix this.

By Robert Rapier

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