Jim mentions one of the reasons for increasing gasoline and diesel prices: insufficient oil-refinery capacity. In the long run, that’s more concerning for U.S. energy policy than the war in Ukraine or even domestic crude-oil production.
Refining should be America’s greatest energy-industry strength. The ordinary conversation around “energy independence” doesn’t quite get it right. The U.S. is indeed blessed with oil and gas reserves, but so are many other countries. Venezuela, Saudi Arabia, Iran, Canada, and Iraq all have far more proven reserves than the U.S. does. And the, er, varied record of those countries should demonstrate that simply having lots of oil is not automatically a blessing.
What sets the U.S. apart is refining. Jim points out that there are 129 oil refineries in the U.S. There are only about 700 refineries in the entire world. Many foreign oil companies build their refineries here (the largest U.S. refinery, in Port Arthur, Texas, is owned by Saudi Aramco). U.S. refineries are also able to process more types of oil than many other refineries. Western Canadian oil is some of the most difficult to refine, and a majority of U.S. crude-oil imports are from Canada.
The U.S. is always a net importer of crude oil. When the Trump administration was touting America as a net energy exporter, it was telling the truth. But the reason America was (and still is, depending on the month) a net energy exporter is because of our exports of refined products, not crude oil. Even at the peak of U.S. energy exports in 2019 and early 2020, the country saw net crude-oil imports of around 2 million barrels per day.
Other countries wish they had the technical know-how of Americans. Our energy advantage is not found underground; it’s in our people. The best geologists and engineers in the world graduate from American universities, and they get paid big bucks to work in oil exploration and refining. The refining industry provides solid jobs to non-college-educated workers as well.
The U.S. has built this incredible energy infrastructure mostly through private investment. Unlike other countries where the energy sector is mostly state-owned, the U.S. has a competitive oil-and-gas industry that prizes efficiency and production.
That the U.S. is now running up against a wall on refining capacity is indicative of a much more serious problem than the disturbances from the war in Ukraine or even the pandemic. Those disturbances are a big deal, and they are contributing to high gasoline and diesel prices, but they will ultimately prove temporary. But if there’s one energy problem that the U.S. should not have, it’s insufficient refinery capacity.
Why isn’t more investment going into refining? One reason is regulatory hostility. Investing in refining equipment is extremely expensive, and projects take many years to complete. It’s not smart business to put billions of dollars into refinery expansion if you think there’s a chance that the presidential administration (or the next presidential administration) will do its best to shut it down.
Another reason is the ESG trend, which frowns upon investment in anything fossil-fuel related. Despite the recent energy struggles worldwide, ideological pressure on the financial industry to avoid fossil fuels continues. Ideologically motivated investment may feel good to those who are doing it, but it can throw a wrench into the economic system by preventing money from going to where it is most needed.
Ideological trends aside, oil companies have been struggling to find investment in the aftermath of the fracking boom, during which they made relatively small profits while expanding at a rapid pace. Investors want a higher return, and oil companies have been signaling more discipline by being less aggressive in responding to market fluctuations.
Investors untroubled by green ideology are beginning to give energy a second look in recent months, which is encouraging. But there’s no way to make up for all the investment that didn’t take place over the past few years. We need more refining capacity now, which means we needed more refinery investment five to ten years ago.
The U.S. must learn from its mistakes (both public and private) and prioritize refining. If we fail to learn now, we’re only setting ourselves up for future crises that will have nothing to do with Vladimir Putin.