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Why Is Gasoline So Expensive? Lack of Refining Capacity

by Noah Carl
10 June 2022 1:48 PM

The price of gasoline (petrol, to us Britons) has reached record highs in both Europe and the U.S. Americans are now paying almost $5 per gallon at the pump, compared to half that amount at the start of 2020.

Two major reasons for these price spikes are well known. First: OPEC slashed production during the pandemic in response to cratering demand, and hasn’t yet boosted output to pre-pandemic levels. Second: sanctions against Russia, as well as self-imposed restrictions on some exports, have reduced total oil production and fuelled uncertainty in the global market.

Okay, if the supply of oil is down, but demand is back up, then all we have to do is pump more oil, and the price of gasoline will fall – right? Not so fast. There’s an additional reason why the price of gasoline is so high: lack of refining capacity.

In simple terms, the way the oil market works is as follows: producers pump oil out of the ground; they then send it to refineries, which ‘crack’ the oil into gasoline, diesel and jet fuel; these refined products are then sold to the market. Which means that – regardless of how much oil is actually produced – the supply of gasoline is limited by refining capacity.

As commodities analyst Javier Blas notes, we can tell that refining capacity matters by looking at the ‘crack spread’ – the difference between the price of crude oil and the price of refined products.

In January of 2020, crude oil was trading at $65 per barrel, while the price at the pump was $109 per barrel. (To get the price at the pump ‘per barrel’, you simply multiply the price per gallon by 42.) As of today, crude oil is trading at $122 per barrel, while the price at the pump is $209 per barrel. This means the ‘crack spread’ has increased from $44 per barrel to $87 per barrel. (Note: there are more appropriate measures of the ‘crack spread’; I used this one for ease of explanation.)

Since the end of 2019, global refining capacity has dropped by about 2 million barrels a day. Why?

Dozens of refineries in the U.S. and Europe were shuttered during the pandemic – when they were simply not profitable to operate. And while new ones have been built in China, “that capacity is effectively out of reach of the global market”, Blas tells us.

So why don’t we just build more refineries, or reopen the ones that are closed? It’s not quite that simple, as both of these things take time. And in any case, companies are reluctant to make the costly investments that would be required to meet new environmental regulations.

The upshot is that even if Biden manages to persuade the Saudis to pump more oil, the price of gasoline is unlikely to fall dramatically any time soon.

Tags: InflationOilRefining capacity

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15 Comments
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JohnK
JohnK
3 years ago

It’s certainly true that global pricing of crude is a major factor. Errr, ‘refining’ from simple terms a bit, it’s true that there are fewer operational refineries in the UK now than there were a decade or so ago. Just a few relatively large ones, like Fawley, Stanlow, Grangemouth – maybe a couple more.

Also, the output from refineries does not go direct to retail sales. Rather, it moves on to elsewhere at which blending with other compounds, notably denatured ethanol to make E10 petrol, soon before delivery to retailers. The storage duration for the mixture is much shorter than pure gasoline, hence the need to delay the latter stage as much as possible, setting aside the normal seasonal variations between winter and summer.

There are many more distribution locations c.f. refineries, many of which are fed via pipelines from the former, or by trainloads.

The market for the production of denatured ethanol is a topic in it’s own right. Here a fair bit of it is related to wheat prices (*animal grade’), for example, whereas in the US I think a lot of it is made from Corn (Maize). So it’s not just the price of oil that affects the price of fuel these days.

15
0
EppingBlogger
EppingBlogger
3 years ago
Reply to  JohnK

Ah, yes. Ethanol. The material that reduces the efficiency of petrol and rusts engines. I recently bought a small engined machine and the warranty is void if I do not put in further additives to counter the rusting corrosive effects of ethanol.

Round and round in circles

6
0
JohnK
JohnK
3 years ago
Reply to  EppingBlogger

Some sources say that the ‘shelf life’ of E10 is no more than 90 days, so any seasonal machinery is at risk, especially with half empty tanks, with moist air in the other half. The ethanol is ‘water prevalent’, so after a while a certain amount of it dissolved in water builds up at the bottom, as it’s density is higher than that of the petrol mixture. Sooner or later, it’ll get sucked into the fuel system, and that’s when the trouble starts.

2
0
JohnK
JohnK
3 years ago

Another issue is the current ownership of some of these refineries. E.g. the Stanlow one looks a bit dodgy, if you look it up. http://www.abarrelfull.co.uk/Stanlow_Refinery A few headlines re articles in the Grauniad seem to suggest that they might go bust – that would lead to a spike in prices, you’d think.

1
0
TheGreenAcres
TheGreenAcres
3 years ago

Crack Spread, probably not a topic of conversation at the dinner table this evening.

10
0
EppingBlogger
EppingBlogger
3 years ago
Reply to  TheGreenAcres

Only today the MSM was complaining that invitations to dinner parties had dried up – maybe there is a hint here somewhere.

0
0
richardw53
richardw53
3 years ago

These two reasons are within the global anti-fossil fuel campaign, under which governments grant fewer licences and investment is disincentivised. A recovery from the Covid pandemic, under normal market conditions, would have taken place.

11
0
JohnK
JohnK
3 years ago
Reply to  richardw53

Indeed. Those promoting electric traction on the roads wouldn’t mind how unstable the oil industry is. However, the reliability on the other side of the coin is another issue.

5
0
BillRiceJr
BillRiceJr
3 years ago

From what I’ve read, the refiners also have to produce numerous “blends” of gasoline to comply with various environmental regulations. These regulations are not the same in every state. For example, California has many more regulations and requires many more blends at different points in the year.

This means the product that is pushed through pipelines has to be paused to first do Blend A, B, C, D, etc. If you didn’t have all of these different gasoline recipes, supply would be much better and the prices at the pump cheaper (I think).

Also, we now have to have 10 percent Ethanol added to gasoline. This has always been ridiculous and this regulation must also add to the price of a gallon of gas. Just do away with this silly requirement, which is a payoff for the corn lobby. Plus, don’t people need corn to eat these days?

Taxes of course vary by state and, hypothetically, could be eliminated or reduced, but we know this won’t happen.

Until prices drop, how about doing away with turnpike tolls and waving all of these speeding and red light tickets where all of those Orwell cameras nab criminals?

11
0
crisisgarden
crisisgarden
3 years ago

How dare anyone suggest that this isn’t 100% the fault of Putin.

14
-1
Marcus Aurelius knew
Marcus Aurelius knew
3 years ago

Honest question:

Has the percentage of tax per litre of diesel/petrol remained unchanged in the UK since people were paid to sit at home doing nothing?

3
0
JohnK
JohnK
3 years ago
Reply to  Marcus Aurelius knew

https://www.gov.uk/government/publications/changes-to-fuel-duty-rates/fuel-duty-rates-2022-23

That’s the excise duty, but they charge VAT on top of that plus the retail price. Obviously, the Treasury would have lost revenue when the oil price was down a bit but they are doing well now. This trimming the excise by 5p/litre won’t have lost them much, given what has happened to the net income at today’s prices – almost double compared with two years ago,

1
0
EppingBlogger
EppingBlogger
3 years ago

We have suffered this for years in the UK where we have for much too long been importing oil products. Not only do environmental protection measures make local refining much more expensive than in the overseas countries, but with the political class intent on prohibiting hydrocarbon engines in a decade or so, why would anyone risk their time and money.

Much better to become a consultant to government advising on wokery, greenery, etc

7
0
Covid-1984
Covid-1984
3 years ago

Behind the curve. Nigel Farage told us 3 weeks ago. GB News is one of the very few straight talking media programmes.

8
0
RTSC
RTSC
3 years ago

Nigel told us this on Tuesday or Wednesday this week. The UK, in particular, has slashed its refining capability as part of the Net Zero lunacy. Guess who does “our” refining ….. Russia! THAT’s why the price of petrol/diesel in the UK is so high (plus of course the tax).

3
0

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