Opinion: Gas prices head to $6 by Labor Day — here’s the main reasons

President Biden The last message to the refineries Complaining about high gasoline prices is the only positive action he can take on behalf of consumers. But it won’t keep the average price at the pump in the US from rising another dollar by September and above $6.

Here’s why: US refining capacity is shrinking even with CL.1 oil,
Production is recovering from the lows of the COVID-19 pandemic, and the well-known shift in European demand away from Russia has squeezed US stocks deeper than many realize. In addition, Biden’s ability to act is further limited by the unappreciated policy decisions he ironically helped make.

The first major policy shift occurred in 1973 – the year Biden joined the Senate – when President Nixon eliminated President Eisenhower’s quota of oil imports to fight inflation. Cheap OPEC oil began to flood the US market and undermine domestic producers.

The subsequent Arab oil embargo from October 1973 to March 1974 raised crude oil prices everywhere except in the United States, because the price controls imposed by Nixon in August 1973 were in place. While local refineries could buy and refine foreign oil – which they did – selling it at home was losing money. The gasoline that came to the domestic market was limited by the amount of domestic crude oil that was under price control. This has led to long lines of people waiting to fill in the blanks, gas rationing in some states, and a federal mandate Speed ​​limit 55 miles per hour.

As domestic crude oil price controls were more or less maintained until the Reagan administration, the United States became increasingly dependent on foreign supplies matched only by Alaskan oil that was not subject to price controls or the Crude Oil Profit Tax Act of 1980.

The second major shift in policy occurred in 2015, when Congress ended its 1974 embargo on crude oil exports. This was the hydraulic fracturing boom, when so much lighter crude oil was pumped from the ground that supplies overwhelmed local refineries’ ability to process lighter oils.

Other refineries are configured to process heavy oils imported from Canada, Venezuela, Saudi Arabia and Mexico, and lifting the export ban has removed any profit motive for heavy oil refineries to reprocess them. Today, the United States remains imports More than 6 million barrels of heavy crude oil, about a third of total demand.

Fast forward to 2022. With the outbreak of the Ukraine war and sanctions on Russian hydrocarbons, there is more demand for oil-related products from the United States, as Europe replaces Russian supplies with purchases from the global market. The United States is one of the sources of these sales, and this would not have been possible had the export ban remained in effect. As a result, US inventories of refined products and crude oil have fallen below the five-year average.

US Energy Information Administration

The third major policy shift was the withdrawal from Afghanistan, thus ending the “blood for oil” trade that President George W. Bush had begun with the invasion of Iraq and continued through President Trump. Former Federal Reserve Chairman Alan Greenspan in his book “era of turmoil“I am saddened that it is politically inconvenient to admit what everyone knows: the Iraq war is very much about oil,” he said. President Biden does not have the military in the Middle East, to protect Saudi Arabia, as a bargaining chip over low oil prices.

Mathematics is not suitable for expanding refineries

As Biden correctly points out, US refining capacity is down. Many have closed in recent years simply due to rising operating costs, conversion to renewable fuels, (such as Bakersfield, California, one in San Francisco, many in the middle of the continent, now underway), increasing environmental restrictions, and damage from hurricanes. Someone exploded. Some have been on the market for years without buyers due to low profit margins and significant environmental responsibilities.

US refinery shutdown

Capacity, bpd



PES, Philadelphia, Pennsylvania


June 2019

Explosion; bankruptcy

Holy Frontier Cheyenne, Wisconsin


June 2020

Switching to renewable fuels

Calcasio Refining, Lake Charles, Los Angeles


August 2020

low demand

Petroleum Marathon, Martinez, Calif


August 2020

Switching to renewable fuels

Petroleum Marathon, Gallup, New Mexico


August 2020

low demand

Shell Abbey, Saint James, Los Angeles


November 2020


PBF Energy, Bullsboro, NJ


November 2020

low demand; partial operations

Limetri Bay, St. Croix, USVI


May 2021


Philips 66 Alliance, Bill Chase, Los Angeles


November 2021

Storm damage

Philips 66 Rodeo, California


May 2022

Switching to renewable fuels

Leondale Basil, Houston, Texas


April 2022

Closed on or before 12/23

source: Laura Sanicola (Reuters) And company ads

That’s before taking into account the push for renewable fuels and electric cars. Profit margins are a meager 1.5%, and a new refinery could take five years – if all goes smoothly – and more than $20,000 a barrel of capacity to build. It’s been three years since ExxonMobil’s report was released $1.5 billion250,000 barrels per day at the Beaumont refinery, Texas.

Payments to build new refineries or expansions are uncertain in the long term, especially for companies such as Marathon Petroleum MPC,
-5.10%And the
Valero VLO,
-5.31%And the
and Philips 66 PSX,
That is only in the refining business. It is worth noting that the three have announced projects for renewable fuels.

But before oil reaches the refinery, it must be found and produced. There again, the industry has not fully recovered from the pandemic. Baker Hughes reported that the file of The number of American rigsthe drill gauge, increased this year by 270 to 740, but down from the previous epidemic figure of 794 in January 2020. Moreover, good costs Above one that cost $9 million to dig five years ago now costs $13 million. Tens of thousands of workers have left the oil slick and will not return. Trump’s tariffs on steel and supply shortages have doubled the cost of the pipes.

It’s not just an American problem. Baker Hughes reported that the file of The number of drilling rigs in the Middle East At 817, it is still more than 25% lower than the pre-pandemic level of 1,104. Wells in the Middle East are far more productive than US shale wells, and lest we forget, the reason OPEC launched an extended price war against US producers a decade ago that pushed oil below $40 a barrel in 2014.

The Middle East has been hit hard by the global pandemic shutdown. Revenue decreased. that it They are under the illusion that OPEC countries have excess supply for delivery to the world market. At these prices, everyone should produce.

Reports is that Russian crude oil production has fallen since American and European oil companies and oilfield service companies exited the country. At the same time, the Russian army needs more oil for the war in Ukraine. These two measures combine to reduce the net supply available to the global market and put further upward pressure on the price.

European countries are unlikely to adopt oil and gas supplies to Russia after the war. Since it will take Europe a number of years to fully adjust, the United States will continue to sell more refined products and oil to Europe. American consumers compete for gasoline versus buyers in Berlin.

Biden’s frustration is clear. continue to release 1.0 million barrels per day from the country’s Strategic Petroleum Reserve, but the impact on the price was minimal. some go overseas Americans subsidize fuel prices around the world. Stock is limited, and in this competitive gameOPEC has more staying power.

The bottom line is that there are no quick fixes for Biden or Congress. Short-term policy measures in the name of midterms and convenience will fail to help consumers. A recession may halt the overheating US economy to reduce gasoline demand, but the political costs will be even higher.

Anyone who claims to have a fix is ​​just playing politics.

Ed Herz He is a senior fellow at the University of Houston Energy. Follow him on Twitter edhirs.