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Oil Refiners an Easy, but Odd, Target for Pump-Price Surge

Oil Refiners an Easy, but Odd, Target for Pump-Price Surge #Oil #Refiners #Easy #Odd #Target #PumpPrice #Surge Welcome to Lopoid

Gasoline prices are at records, and refiners’ spectacular profits are putting them in the hot seat. They are an obvious, but odd, target.

The White House confirmed in a briefing on Tuesday that oil majors and refinery executives will meet with Energy Secretary

Jennifer Granholm

on Thursday to discuss ways to reduce costs for energy consumers. Last week President

Biden

sent a letter to oil-refinery executives, accusing them of reaping profits at the expense of consumers and urging them to expand capacity.

Refiners are, indeed, logging impressive profits lately and making hay while the sun shines: They have been running at almost 94% of operable capacity, according to the U.S. Energy Information Administration—close to the 96.6% peak reached in the past decade. In just the first three months of this year,

Marathon Petroleum

MPC -2.52%

and

Valero Energy

VLO -2.87%

—among the largest U.S. independent refiners—reaped profits comparable with what they each made in all of 2019. Both companies’ executives are expected to be at the meeting on Thursday.

Why the bumper profits? While global demand for petroleum products—ranging from gasoline and diesel to jet fuel—has been recovering, the ability to produce it hasn’t. U.S. refining capacity has dropped to roughly 17.9 million barrels a day as of March 2022, from 18.8 mb/d in December 2019, according to the EIA. A lot of that decline can be chalked up to the pandemic shock of 2020, which led some refineries to shut down and others to convert to produce renewable fuel. That, combined with limited refinery capacity elsewhere in the world and a ban on Russian oil and petroleum-product imports, have only made market conditions tighter.

High natural-gas prices are likely fueling the problem. Because the petroleum-product market is a global one, record natural-gas prices in Europe (they are more than four times where they were a year ago) mean costs at European refineries are much higher, contributing to higher prices. Refineries are energy intensive and use natural gas to power their boilers and as a source of hydrogen to lower the sulfur content of diesel fuel. High natural-gas prices in Europe “makes the cost curve steeper for everybody,” notes

Matthew Blair,

equity analyst at Tudor, Pickering, Holt & Co.

U.S. gas prices have hit a record high and are showing no signs of going down. That’s largely because oil companies are no longer incentivized to drill more as oil prices rise. WSJ’s Dion Rabouin explains. Photo composite: Ryan Trefes

But refiners’ impressive profits today are an exception, not the rule. The WTI 3:2:1 crack spread, a measure that tracks the difference between the purchase price of crude oil and the selling price of finished products, is at more than $53 a barrel. Over the past 15 years, that difference was a less-appetizing $16 a barrel, on average. Operating margins at U.S. independent refiners are far closer to that of grocery stores than that of oil producers.

Moreover, refineries are expensive investments that require strong long-term signals. For a long time, those signals just haven’t been there. U.S. demand for finished petroleum products increased at a compound annual growth rate of less than 0.4% in the decade leading up to 2019, according to EIA data.

Is there anything that can be done to bring prices down in the short term? Restarting idled capacity won’t be cheap or quick.

Philip Verleger,

energy economist, wrote in a recent report that restarting a refinery is a careful process that takes months, sometimes more than a year. Some moves might help bring gasoline prices down a bit, but they are likely in the order of a “few nickels here and there,” notes Mr. Blair.

Measures that actually could bring fuel prices down a bit in the short run pit the fuel industry against other influential industry groups, making them less politically palatable. These include suspending the Jones Act, a move that would make it cheaper for fuel cargo to travel between U.S. ports but would face opposition from the shipping industry. Relaxing renewable-fuel standards, which create compliance costs for refiners, is another option but would be deeply unpopular with ethanol lobbyists and farm-state politicians. Banning product exports might provide some relief but will likely come at a hefty geopolitical cost.

The latest proposal? President Biden is reportedly considering a federal gasoline-tax holiday, which would further stoke demand for refiners’ products at a time of tight supply. That’ll show them.

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How should oil refineries be responding to high gasoline prices? Join the conversation below.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

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