Already Gone - U.S. Refinery Shutdowns a Major Contributor to Refined Products Squeeze and High Prices

As the price of gasoline continues its seemingly never-ending upward path in the U.S. (not withstanding a bit of a pause in the past week), the cause (or blame, if you prefer) continues to shift. Of course, the Biden administration has heavily promoted the phrase “Putin’s price hike,” and the Russian president can certainly claim some of the blame. His invasion of Ukraine and the subsequent sanctions on the world’s second-largest exporter of refined products (after the U.S.) have led to the loss of several hundred thousand barrels per day of product supply. However, prices for refined products were already rising before his late February invasion due to a variety of other factors, both on the supply and demand sides of the equation. Perhaps the most important factor has been the loss of significant U.S. refining capacity over the last few years, which is limiting the ability of refiners to respond to the strong demand recovery and loss of supply. In its highly publicized June 15 letter to U.S. oil executives, the administration acknowledged this as it demanded refiners reactivate lost capacity and increase production. In today’s RBN blog, we summarize the shutdowns which have taken place in the U.S. and discuss the reasons behind those closures.

Prior to 2019, the U.S. refining industry had been in a general growth phase, adding about 3.5 million barrels per day (MMb/d) of refining capacity since 1995. Over that period, U.S. plants evolved into the most competitive facilities in the world and the U.S. became the world’s largest exporter of refined products — a necessary step since domestic demand growth was slowing due to demographic factors, improved fuel efficiency, and policies encouraging a shift away from petroleum fuels.

The refining-capacity growth trend wasn’t universal across the U.S., with some regions faring much better than others. The Gulf Coast (as defined by PADD 3) saw the lion’s share of capacity growth, adding about 3 MMb/d since 1995 as it benefited from ready access to growing export markets, primarily in Latin America. Inland refiners in PADD 2 (Midcontinent) and PADD 4 (Rocky Mountains) also grew capacity as they benefited from the boom in light tight oil (LTO) production. On the other hand, crude-supply challenges, a tough regulatory environment and generally higher costs resulted in capacity declines on both the East and West coasts (PADDs 1 and 5, respectively). East Coast facilities were particularly hard hit as the Atlantic Basin is an extremely competitive market, with external supply options from the Gulf Coast, Europe and even the Middle East, resulting in a number of refinery closures and a net loss of over 700 Mb/d of capacity through 2019. Table 1 below summarizes the changes in refining capacity across the U.S. from 1995 through 2019.