The President is reportedly asking oil refiners and integrated companies to “restart idled refineries.” The move marks a pivot in three ways. First, the Administration is acknowledging that prices at the pump are elevated in large part because of a shortage in refining capacity. Second, the response appears to be focused on increasing supply, rather than tax redistribution schemes or trade embargoes. Third, the request appears focused on US operators. The reported request is a pragmatic first step in what could be a short-term and long-term solution to an acute problem, and one that could be both consumer and industry friendly.
Oil refining capacity in the US has been in decline for several years, despite stable demand. However, capacity fell rapidly in recent years as pandemic-induced demand destruction, and government incentives to convert large oil refineries into very small bio-diesel plants, reduced capacity by over 1mb/d. In select cases refineries were converted into oil terminals. Importantly, not all of the announced bio-diesel conversions have been completed. And the President’s request, if paired with reduced policy burdens, could result in a U-turn from industry.
Philips (PSX) has announced plans to convert the 140kb/d Rodeo refinery in San Francisco into a 50kb/d bio-diesel plant. The company is still in the permitting process and could shelve plans, effectively increasing 2023+ refining capacity. Marathon’s (MPC) 166kb/d Martinez refinery is also in the permitting process for conversion into a ~47kb/d bio-diesel plant. Par Pacific (PARR) turned one of its four refineries into an oil terminal in Hawaii. Exxon (XOM) is expanding refining capacity in Texas, and Cenovus (CVE) is rebuilding a refinery in Wisconsin. Outside of the Par (PARR) terminal in Hawaii, its not clear how many refineries are sitting idle, as operators enjoy the best margin environment in history and run flat out to meet demand.
Halting in-process bio-diesel conversions would have the dual benefit of increasing refining capacity in 2023+, while reducing demand for food in the diesel pool. Fewer bio-diesel plants would reduce demand for soybeans (SOYB) at a time when food prices are at a record high. Whether the President’s request will include shelving bio-diesel conversions remains to be seen; however, Friday’s reported announcement is an encouraging sign for consumers.