Refining the Truth: The Reality of Biden’s Latest War on Refiners

Apparently there’s something they don’t teach at Politician School: You can’t bend reality to fit your whims…

That gaping hole in the curriculum has become more and more obvious as our political higher ups keep trying to repeal those pesky laws of market economics, especially where energy goes. For example…

In “Profiteering 101” the only thing they seem to teach is how to condemn greedy corporations who make “too much” in profits. But like all political vagaries, there’s one question that’s never answered…

How much is too much? 

Maybe we should refer that question to Jeff Bezos?

You can’t begrudge anyone who earns profits the size of “Bezos’ Bucks” or “Musk Money.”  As far as I’m concerned, if they earned it, they earned it. 

During the first month of launching Amazon, Bezos and his employees would pack orders on their hands and knees on cement floors

Still, demonizing success stories that started working on their hands and knees as the “bad guy” is a strategy that is tried and true in Washington (by both sides!)

Currently it’s being flexed by the progressive left against the rabidly profiteering oil industry. And that has resulted in some pretty amazing things coming out of their mouths… 

(Energy Secretary Jennifer) Granholm, who has been quite vocal in her support for renewables replacing oil and gas, told the oil industry that a short-term increase in oil and gas would not go counter to the White House’s energy agenda. “We can walk and chew gum at the same time…”

Translated for the energy industry, she basically said, “We’d like you to help us out until we get through this crisis… then it’ll be back to screw you.”

I’ll just bet Jennifer Granholm never packed boxes on her hands and knees.

Common sense be damned, it’s in the administration’s best interests to keep things as simple as possible. That eliminates any important details or the need for critical thinking on anyone’s part. 

So now we have the narrative: “Gas prices that are killing you are Putin’s fault — and the greedy oil companies, who only ever make record profits, won’t do their part to help.”

If you back up far enough and look at that message from a high level, (like maybe the edge of the earth’s atmosphere) there is some basic truth to it. Certainly the Russia/Ukraine war is having some impact on the prices of a lot of things. And oil CEOs aren’t running to throw their companies on the grenade of higher gas prices — even though in the harsh light of reality, there’s little to nothing they can do right now. 

Still, armed with the fragile truth, Presiden Biden launched a full out attack on the bad guys…

“Strongly Worded Letter” to Follow

On June 14, President Biden pulled out all the stops and sent the dreaded “strongly worded letter” to CEOs at all the major oil companies demanding they stop being greedy bastards and make more oil now!

He opened with some “bridge-building” rhetoric…

I am writing to you about the high prices our fellow Americans are paying at the pump, and how we can all play a part in addressing them.

(Keep that opening thought in mind, I’ll be back to it in a second.)

Then he immediately got down to business taking aim at another bad guy… the refinery industry.

…the sharp rise in gasoline prices is not driven only by rising oil prices, but by an unprecedented disconnect between the price of oil and the price of gas. The last time the price of crude oil was about $120 per barrel, in March, the price of gas at the pump was $4.25 per gallon. Today, gas prices are 75 cents higher, and diesel prices are 90 cents higher.

Of all the ignorance on display in this letter, this statement may sum it up the best. It assumes there is some perfect correlation between oil and gas prices which, of course, doesn’t exist and is, of course, absurd. 

But for the President’s purposes, simple is better. And portraying the evil greedy oil villains as the cause behind all our troubles works just fine.  

(Nevermind that the oil industry is a cyclical business, and not an easy one to navigate evidenced by Chevron’s 2019 earnings: Total earnings for 2019 slid 80%, to $2.924 billion, compared with $14.824 billion in 2018.)

The Reality of Refining

Let’s go back to the simplified narrative that the administration so desperately wants to spread. According to the president, all you need to do is simply pump more oil and pour it into a refinery and voila! tankers of gas and lower prices for everyone!

Would it surprise you if I told you it wasn’t that simple?

As with most political versions of how things should work, reality is a bitch.

One particularly inconvenient reality is that not all crude oil is created equal. Depending on its density and sulfur content, crude typically falls into one of six categories:

  • Light Sweet
  • Light Sour
  • Medium Sweet
  • Medium Sour
  • Heavy Sweet
  • Heavy Sour

To give you a little better idea of the types and sources of oil that refineries are dealing with, below is an image (by S&P Global Platts) of something called the Platts Periodic Table of Oil. It displays the different grades of crude along with where they come from. The dark blues are light/sweet while the dark pinks are heavy/sour…

Platts Periodic Table of Oil

The basic job of refineries is breaking down whatever type of crude oil they process into its component parts. But given the different grades of crude, your refinery will need different capabilities to break it down and turn it into something more profitable.

That means… Not all refineries are the same either.

All refineries have something called a “distillation column” that separates the crude oil into various components based on their boiling points. But that’s where similarities end. 

To increase the yields of higher-value products, refineries will build out special secondary processing units to do things beyond simple distillation like:

…increasing separation; upgrading low-value products, like residual fuel oil, to high value products, like distillate; increasing octane; or enhancing environmental compliance by removing sulfur and other pollutants.

This means refineries are typically designed, built and equipped to deal with one specific grade of oil. (Refineries in the US have typically favored the heavier sour grades because they are harder to refine making the crude input cheaper.) 

Reconfiguring a refinery to process different grades of crude oil (depending on what’s available) is no small matter. It takes time and costs money. Refiners have to make decisions based on the prices of the types of crude that is available to them. The availability of the oil itself. Whether or not shortages or limited access will be temporary or long term. How profitable reconfiguring a refinery may actually be.

There are all kinds of decisions that go into whether or not a refinery should sink a boatload of money into retooling a refinery.

A Real Drop in Refinery Output

There has been a loss of refining capacity. 

Six refineries went offline due in part to the drop in demand caused by the pandemic. 

Bringing them back online will not be easy either. There are a lot of factors that go into reopening these plants, not the least of which is replacing the skilled labor that left when plants were shuttered. 

But there’s another unfortunate reality connected to the reduction in refinery output that has nothing to do with the pandemic: Biden’s policies haven’t been particularly refinery-friendly. For instance: 

The EPA set biofuel blending mandates for 2022 at 20.63 billion gallons and retroactive volume mandates for 2021 at 18.84 billion gallons and for 2020 at 17.13 billion gallons.

Under the RFS (Renewable Fuel Standard), oil refiners must blend billions of gallons of biofuels into the nation’s fuel or buy credits, known as RINs, from those that blend more than their share.

These actions reflect the Biden administration’s commitment to reset and strengthen the RFS and support domestic biofuel alternatives to oil for transportation fuel, despite ethanol production using 40 percent of the corn crop needed for feeding this nation and others abroad.

You could say the results have been predictable…

Another U.S. refinery is planning to close by 2024 and maybe earlier, joining six others that have already shuttered. The Houston refinery, which is operated by LyondellBasell industries, is slated to close at the end of 2023 due to the financial burden of upgrading its infrastructure and to advance its decarbonization goals pushed by the Biden administration.

Big Oil’s Reply to the Prez

For whatever reason, the oil industry didn’t seem to want to take all the blame lying down. ExxonMobil published a response explaining a few facts (emphasis mine)…

We have been in regular contact with the administration to update the President and his staff on how ExxonMobil has been investing more than any other company to develop U.S. oil and gas supplies. This includes investments in the U.S. of more than $50 billion over the past five years, resulting in an almost 50% increase in our U.S. production of oil during this period.

Globally, we’ve invested double what we’ve earned over the past five years — $118 billion on new oil and gas supplies compared to net income of $55 billion. This is a reflection of the company’s long-term growth strategy, and our commitment to continuously invest to meet society’s demand for our products.

Specific to refining capacity in the U.S., we’ve been investing through the downturn to increase refining capacity to process U.S. light crude by about 250,000 barrels per day – the equivalent of adding a new medium-sized refinery. We kept investing even during the pandemic, when we lost more than $20 billion and had to borrow more than $30 billion to maintain investment to increase capacity to be ready for post-pandemic demand.

Recently Chevron CEO Mike Wirth sat for an interview with Bloomberg where he also shared a couple stark truths about the oil and refining industries. A couple of his more critical points to understand about oil production: 

“The decisions that lead to today’s activity were made 2 years ago…”

“You’re looking at committing capital 10 years out that will need decades to offer a return to our shareholders…”

In fact, his whole 10-minute chat was so good, I’m leaving a link to it here

Maybe they’re not such ogres after all.

If Biden Really Wanted to Pitch In…

But let’s go back to that “we can all play a part” business. Exactly what part is the Biden Administration prepared to do?

On Wednesday this week, the President faced the country and called on Congress to suspend the 18 cent per gallon federal gas tax. Congress doesn’t appear interested. 

Then he called on states to do the same. (Prior to his statement, NY, Florida, Georgia, Connecticut and Maryland had already passed legislation suspending their taxes.)

On Thursday, his “team” was scheduled to meet with oil execs, to see what kind of plans the industry had come up with to solve Biden’s problem. 

But more directly, in his letter he wrote:

…my Administration is prepared to use all reasonable and appropriate Federal Government tools and emergency authorities to increase refinery capacity and output in the near term, and to ensure that every region of this country is appropriately supplied.

Given the government actually has no “tools” that can directly increase refinery production, the American Petroleum Institute offered a list of 10 suggestions where the government could make a difference…

What will the Biden admin do to help this process along? That remains to be seen.

In the meantime, enjoy your 18 cents a gallon holiday…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Confidential