The price of gasoline is at a record high. What is going on? How long will it last?
Unlike in recent years, today there are some easily identifiable world events and trends causing this. And refining is a big one. That is the main reason that refining company Valero Energy has the second-best growth among S&P 500 stocks in 2022 (as of May 13, 2022).
Before diving into the serious global issues driving this situation, we can all laugh at this comical spoof of your local evening news piece on high gas prices.
A recent BusinessWeek article (The US Can't Make Enough Fuel and There's No Fix in Sight) sheds a lot of light. The drivers are supply-related, demand-related and return on investment (ROI) horizons in the hydrocarbon industry:
- COVID-19 dramatically reduced demand for fuel
- This resulted in some old and low performing refineries to be permanently closed which thereby permanently reduced supply
- In the U.S. this is 1 million BPD (barrels per day) – about 5% of capacity
- Outside the US it is another 2 million BPD
- The long investment horizon (15-20 year payback) needed to repair or improve refineries
- Hurricane damage to refineries in the U.S. Gulf Coast reduced supply
- Long investment payback makes it too risky to repair these facilities
- International divesture of Russian energy (especially by Europe) will reduce available supply of crude oil and refined products
Another article offering insight can be found here: High crack spreads to drive elevated refinery utilisation in the US.
Here are some excerpts from the BusinessWeek article:
In other kinds of markets, a surge of demand and shortage of supply would trigger more investment, especially with such swelling cash hordes. But the longer-term transition away from fossil fuels dims the outlook for demand, making companies unwilling to put up the billions of dollars needed to build new plants. Even resurrecting idled plants can be prohibitively costly at a time when construction and labor costs in the U.S. are booming. With California unveiling this week a roadmap to slash oil use by 91% from 2022 levels by 2045 and other places moving to limit fossil-fuel use in the decades ahead, refining companies and their investors can see the writing on the wall.
Phillips 66, for example, would have to spend more than $1 billion to restart its Alliance refinery in Louisiana that was shut after damage from Hurricane Ida, Bloomberg Intelligence estimates. LyondellBasell Industries NV has opted to shut its Houston Refinery no later than the end of 2023 over cost concerns related to keeping the 104-year-old facility running.
From a consumer point of view, it appears we all will need to get used to higher gas/petrol prices. From an engineering perspective, those who work in or supply products to the refining industry should have improved business stability over the next 10-20 years.