A few words about refining. This is not an area where I claim much expertise, beyond a materials science college course that covered hydrocarbon chemistry many years ago and pumping my own gas. World oil prices are distorted by the Ukraine war. In turn, gasoline prices are also distorted. You can see it in this chart:
Gasoline prices are behaving as though they are constrained by supply. Since gasoline is apparently an exportable product, U.S. domestic prices are affected by world market prices. So if you bid $3.00 a gallon for Exxon gas, but Brazil bids $4.00, guess who Exxon will sell the gasoline to? This appears to be well-documented (see WSJ article) but never referenced by politicians. Washington D.C. could regain control over prices by passing legislation prohibiting exports of fuel from the U.S. If they have decided not to do that, it may be because they know that it would be bad policy.
Refining is constrained because, although the U.S. is generally well-supplied with refineries, the number of existing working refineries is shrinking and has been for a long time. The industry, taking cues from actual declines in demand (driven by auto manufacturer fleet MPG requirements and increasing numbers of EVs on the road) and extremely popular left-leaning climate change rhetoric, has taken the message ("DON'T BUILD REFINERIES") seriously.
Of course, the screaming on Twitter by know-nothings echoes the politically-motivated outrage and moral grandstanding by Biden. It's a temper tantrum, deserving of the same respect one would give a two year old's demands for candy. I find it much easier to believe the American Fuel & Petrochemical Manufacturers, especially when they cite a Motley Fool posting that cites Chevron's Mike Wirth saying that "he doesn't believe there will ever be another new oil refinery built in the U.S."
Chevron like all of the other oil majors, is making money this year. But overall the oil business has had a tough past six years. Chevron made losses or near-zero earnings in 2015, 2016, 2017, 2019, and 2020.
It's very difficult to have sympathy for the critics of the oil industry. Sure, all customers want your best product for free, but, by definition, no industry can survive when it is directed to commit suicide. The lack of mature understanding and lack of cooperative spirit makes it clear that those criticizing the oil industry are not capable of providing supervision for a complex modern economy.
Oil supplies in the U.S. are tight, but not tight enough to be the bottleneck. Clearly it is refining, as you can see in these tweets outlining the long term business prospects and current utilization, which is so near 100% the industry is probably setting records:
CHART OF THE DAY: US refineries in the Gulf of Mexico (PADD3) are running the hottest for this time of the year in at least 30 years: 97.9% of their capacity running. Surreal. You can not run hardest than this. Whatever the White House says | #OOTT pic.twitter.com/NpcpkwDuBl
— Javier Blas (@JavierBlas) June 29, 2022
As long as the futures curve implies low prices in the future, it will be difficult to incentivize production. After having their teeth kicked in from 2014-2020, the survivors don’t want to commit to risky expensive capex unless they can hedge their risk.https://t.co/1WHZ6cOm4l
— cogito, ergo lorem ipsum (@randolph_zeke) June 14, 2022
A Barron's analysis found that profits of gas stations are actually down this year.
U.S. Government figures match what the industry is saying. The U.S. Energy Industry Administration data shows refineries over time if you want to check.
Once you understand the refinery situation, it's clear why tapping the Strategic Petroleum Reserve could and would result in sending oil to China. Refineries already have 100% of their supply lined up. Adding to crude supply then just sends it to the next hungry market, part of which will be overseas. Strategically, it might make a small amount of sense to capitalize on high oil prices by selling some of the SPR oil. After all, we got that SPR oil cheap when Trump decided to add to SPR reserves against a rainy day. The rainy day is here. The U.S. Government is making a profit from the oil shortage. What's wrong with that?
Links in this article:
https://www.wsj.com/articles/high-u-s-fuel-exports-are-contributing-to-5-a-gallon-gas-11655371801
https://www.fool.com/investing/2022/06/05/chevrons-ceo-says-no-more-us-oil-refineries-what-s/
https://www.afpm.org/newsroom/blog/refining-capacity-101-what-understand-demanding-restarts
https://www.eia.gov/dnav/pet/pet_pnp_cap1_dcu_nus_a.htm
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