The president would ask oil refiners and integrated companies to “restart idle refineries.” The movement marks a pivot in three ways. First, the Administration recognizes that pump prices are high largely because of a shortage of refining capacity. Second, the response appears to be focused on increasing supply, rather than tax redistribution programs or trade embargoes. Third, demand seems to be geared towards US carriers. The reported request is a pragmatic first step in what could be a short and long-term solution to an acute problem, and which could be both consumer and industry friendly.
Oil refining capacity in the United States has been declining for several years, despite stable demand. However, capacity has fallen rapidly in recent years as pandemic-induced demand destruction and government incentives to convert large oil refineries to very small biodiesel plants have reduced capacity by more than 1 mb/d. In some cases, refineries have been converted into oil terminals. It is important to note that not all announced biodiesel conversions are complete. And the president’s demand, if paired with a reduction in political burdens, could lead to an industry turnaround.
Philips (PSX) has announced plans to convert the 140 kb/d Rodeo refinery in San Francisco into a 50 kb/d biodiesel plant. The company is still in the licensing process and may suspend plans, increasing refining capacity by 2023+. Marathon’s 166 kb/d Martinez Refinery (MPC) is also in the process of being licensed for conversion into an approximately 47 kb/d biodiesel plant. Par Pacific (PARR) has converted one of its four refineries into an oil terminal in Hawaii. Exxon (XOM) is expanding its refining capacity in Texas and Cenovus (CVE) is rebuilding a refinery in Wisconsin. Outside of Par Terminal (PARR) in Hawaii, it’s unclear how many refineries are sitting idle as operators enjoy the best margin environment in history and are operating at full capacity to meet demand.
Halting ongoing biodiesel conversions would have the dual benefit of increasing refining capacity in 2023+, while reducing food demand in the diesel pool. Fewer biodiesel plants would reduce demand for soybeans (SOYB) at a time when food prices are at an all-time high. Whether the president’s demand will include dropping biodiesel conversions remains to be seen; however, Friday’s reported announcement is an encouraging sign for consumers.