It’s summertime here in the Northern Hemisphere, and with the sun and warm weather, thoughts are shifting to vacation. Packing the kids in the car for a week at the beach or a trip to grandma’s house is a time-honored tradition. But this year, moms and dads are doing so with an eye on surging gas prices – this road trip isn’t going to be cheap.
Parents aren’t alone in casting a nervous eye on prices at the pump. The White House is, too.
Feeling the pressure in mid-June, President Biden penned a letter to the heads of ExxonMobil, Chevron, BP America, Shell USA, Phillips 66, Marathon and Valero acknowledging that while the Russian invasion of Ukraine and resulting war have roiled global petroleum markets, the refiners in the United States were enjoying “historically high profit margins for refining oil into gasoline, diesel and other refined products.”
He continued that his administration “is prepared to use all reasonable and appropriate Federal Government tools and emergency authorities to increase refinery capacity and output in the near term, and to ensure every region of this country is appropriately supplied.”
The Industry Response
Chet Thompson and Mike Sommers, heads of the American Fuel and Petrochemical Manufacturers and the American Petroleum Institute, respectively, responded the following day, observing that according to the U.S. Energy Information Administration’s own data, “U.S. refineries are running at 94 percent of capacity – among the highest in the world – and are producing more gasoline and diesel than current U.S. demand.”
Their educational three-page letter summarizes other factors affecting the current price of gasoline, including that:
- Like crude oil, the price of refined products is set on global markets, not by the refiner.
- Refinery conversions to produce renewable fuels (e.g., biofuels) accounts for about half of the current shutdowns.
- Numerous policy decisions by this administration have sent repeated signals that do not support long-term investment in refining capacity.
- Increased refinery capacity without additional crude oil production is likely to drive demand for (and therefore prices) for refined products higher.
- There is additional refining capacity coming online where it makes business sense, but that these investment decisions are not simple, given the uncertainty in the markets.
“To protect and foster U.S. energy security and refining capacity,” Thompson and Sommers write, “we urge you to take steps to encourage more domestic energy production, including promoting infrastructure development, addressing escalating regulatory compliance costs, allowing all technologies to compete to reduce emissions, modernizing fuel policies, and ensuring capital markets are functioning for all participants.”
Both ExxonMobil and Chevron CEOs also responded to the president’s letter, outlining what their companies were doing in response to the concerns of escalating gas prices affecting U.S. consumers.
‘It’s Different This Time’
The Federal Reserve Bank of Dallas conducts research on trends in the energy sector, publishing regular reports and survey results. The responses of the 85 E&P companies and 52 oilfield services companies who answered the second-quarter survey questions, show that:
- Oil and gas production continued to increase, though not at the same rate as in the previous quarter.
- Costs have increased for the last six quarters, reaching record highs in the six-year history of the survey.
- Supply-chain delays continue to worsen.
- There is strong growth in employment in the sector, both in terms of hours worked and wages.
In a section of special questions in the survey:
- 47 percent of respondents said that supply-chain issues were having a slightly negative impact on their firms, while another 47 percent indicated the impact was significantly negative.
- More than 60 percent of respondents did not see these issues resolving in under 12 months.
- Assessing the availability of personnel, steel tubular goods, equipment, sand and chemicals, the respondents saw the most significant shortage in steel tubulars.
- More than 45 percent of respondents indicated labor shortages, cost-inflation and/or supply-chain bottlenecks as the most significant source of uncertainty for their business.
- Expectations for crude oil production growth from December 2021 to December 2022, show that 37 percent of respondents expect growth between 800,000 to 1 million barrels per day, while 34 percent expect growth less than 800,000 barrels per day.
Comments submitted with the responses to these questions are illustrative. Respondents expressed not just operational challenges, but also great frustration with the energy policy direction of the nation. Access to capital also remains a concern.
“Investors are still not coming back to the well, so to speak,” wrote one person. “Private investors like endowments and foundations are structurally gone for good, and it is actually different this time.”
What isn’t different this time is policymakers’ desire to scapegoat the industry that is essential to solving the problem of high gas prices (and so much more).
What isn’t different this time is the failure to recognize, as Thompson and Sommers succinctly put it, “today’s situation did not materialize overnight and will not be quickly solved.”
So, pull out the lawn chairs and fill the kiddie pool in the backyard. We’re not going to go see grandma this summer, kids.