Meet in the Middle? - Can the Biden Administration, E&Ps and Refiners See Eye to Eye on Anything?

In the next few days, U.S. Energy Secretary Jennifer Granholm will hold an emergency meeting with leading energy executives to discuss steps E&Ps and refiners could take to increase crude oil production, refinery capacity and the production of gasoline, diesel and jet fuel, all with the aim of reducing prices. The prelude to the get-together was less than ideal, though. In a June 14 letter to the top brass of four integrated oil and gas giants and three large refiners, President Biden criticized them for “historically high refinery profit margins” and for shutting down refining capacity before and then during the pandemic. In addition to rejoinders from the companies, the American Petroleum Institute (API) and the American Fuel & Petrochemical Manufacturers (AFPM) defended their actions, discussed the complexity of refined products markets, and asserted that the Biden administration’s statements and policies have actually discouraged investment in refining and oil and gas production. Is there a middle ground here? In today’s RBN blog, we look at the high-level correspondence and discuss how at least some compromises might be possible.

It should be acknowledged up front that both the administration and energy industry executives have constituencies to speak up for — and answer to. President Biden owes his electoral victory at least in part to the far-left wing of his party, which insists on aggressive action on climate-related issues, and he seems personally committed to expanding and accelerating the climate-action pace set by then-President Obama a few years ago. President Biden also is facing a general public increasingly upset — enraged, in many cases — about the high cost of gasoline and diesel. Energy execs have a number of constituencies too, including investors and, as we’ve discussed in a number of blogs, management’s focus — after hard lessons learned from many boom-and-bust cycles — has been on financial discipline, only-modest investment in incremental production and capacity, and returning cash to shareholders via dividends and share buybacks. E&Ps and refiners also face increasing pressure from many institutional investors and others to diversify into renewable energy, hydrogen, and carbon capture.

In his letter to the leaders of ExxonMobil, Chevron, Shell, BP, Valero Energy, Phillips 66 and Marathon Petroleum last week, President Biden said that his administration has taken a number of steps to ease the crude oil supply/demand imbalance and hold down motor fuel prices, including the largest-ever release from the Strategic Petroleum Reserve and the expanded use of E15 (gasoline with 15% ethanol) to stretch overall gasoline supplies, as well as the possible use of the Defense Production Act to bolster the production of refined products. He added, however, that “(t)he lack of refining capacity — and resulting unprecedented refinery profit margins — are blunting the impact” of the SPR releases and other measures his administration has implemented to address “Vladimir Putin’s Price Hike.” Biden said he “understand(s) that many factors contributed to the business decisions to reduce refinery capacity” by more than 800 Mb/d in 2020, “(b)ut in a time of war, refinery profits well above normal being passed directly onto American families are not acceptable.”