On the menu today: You’ve heard a lot about gas prices, and hopefully at some point you’ve noticed that, as bad as it is to fill up your sedan or SUV, the cost of diesel fuel is skyrocketing even faster. Today, we’re taking a deep dive into why diesel-fuel costs are rising so quickly — and no, President Biden, it’s not just because oil companies are “greedy.” It has a lot to do with the shutdown of six refineries, the upcoming closure of a seventh, and the fact that the U.S. has built only one new oil refinery since 1977.
Diesel, Diesel, Diesel
Because the president has informed us that he is not a mind-reader, and thus cannot foresee problems such as the infant-formula shortage, allow me to assist him by putting a spotlight on the next giant flashing neon sign of trouble that he and his team should be watching closely: the cost of diesel fuel.
As of this morning, the national average cost of a gallon of diesel fuel is $5.57 — which is the record high, according to the American Automobile Association. A year ago, it was $3.17 per gallon. (The national average cost of a gallon of regular gasoline this morning is $4.52; one year ago, the cost was $3.04.)
We are now reaching the point where the cost of diesel fuel is making some goods too expensive to transport. One trucker told the Orlando Fox affiliate yesterday that, “The cost of diesel is single-handedly taking us out of the game one by one no matter how big you are. . . . If you’re getting paid $2 per mile you’re not taking that load no matter if it is baby formula or orange juice because the cost of diesel is $5 plus. You just can’t take that load.”
Tractor-trailer trucks loaded up with goods are heavy, meaning that they average “only 6.5 miles per gallon. Their efficiency ranges wildly between 3 miles per gallon going up hills to more than 23 miles per gallon going downhill.” Because of their low fuel economy, trucks have massive gas tanks — tanks with a capacity between 120 and 150 gallons — and some trucks may have two tanks for longer hauls. In other words, on one full tank of diesel, a truck can travel 780 to 975 miles. But as of this morning, filling up the tank for that trip will cost $668 to $836 — a cost of 85 cents per mile.
Keep in mind, “A majority of trucking companies pay [drivers] between $0.28 and $0.40 cents per mile according to the U.S Bureau of Labor Statistics. A few companies do pay up to $0.45 cents per mile.”
The default setting of President Biden, Senator Elizabeth Warren, and a lot of other Democrats is that if something is expensive, it is because some company is being greedy, and that the way to “bring down inflation” to “make sure the wealthiest corporations pay their fair share.”
But the cost of a gallon of unleaded gasoline or diesel fuel is not just a matter of how greedy an oil company feels on any given day and has very little to do with how much that company is paying in taxes. The cost of crude oil makes up 59 percent of the cost of gallon of regular gasoline, and just 49 percent of the cost of diesel. Refining is a slightly bigger share of the cost of a gallon of diesel fuel than of the cost of a gallon of regular gas — 23 percent for diesel to 18 percent for regular, according to the U.S. Energy Information Administration. Distribution and marketing costs make up 18 percent of diesel costs.
And keep in mind, federal taxes on diesel are slightly higher than those on regular gasoline — 24 cents per gallon on diesel compared to 18 cents per gallon on regular.
Another factor that can really drive up the cost of a gallon of diesel is the total state tax — which currently averages 55.8 cents per gallon across all 50 states. Right now, in California, the total taxes on diesel amount to almost a dollar per gallon, which is one reason why the average price in California this morning is $6.56 per gallon when the national average is $5.57.
California has the highest taxes, but let’s not overlook Pennsylvania (75 cents per gallon), Illinois (67 cents per gallon), New Jersey (57 cents per gallon), Indiana (54 cents per gallon), Washington (49 cents per gallon), or Michigan, New York, and Ohio (all at 47 cents per gallon). State sales taxes aren’t the only reason states have significant differences in fuel costs, but they’re a big reason.
But if we really want to know why the cost of diesel is increasing faster than the cost of regular gasoline, we need to look at those refining costs. It doesn’t matter how much we “drill, baby, drill,” unless we also have the ability to “refine, baby, refine,” — or we become dependent upon foreign refiners.
Back in 2020, U.S. oil-refinery capacity peaked at 19 million barrels per day, according to the EIA. But because of the pandemic, and the delayed decision to permanently shut down the Philadelphia Energy Solutions refinery after a major accident in 2019, U.S. refinery capacity declined significantly during that year. (PES was the largest oil refinery on the East Coast and refined 335,000 barrels per day.)
In addition to the PES refinery, five more shut down over the course of 2020: the Shell refinery in Convent, La., the Tesoro Marathon refinery in Martinez, Calif., the HollyFrontier refinery in Cheyenne, Wyo., the Western Refining refinery in Gallup, N.M., and the Dakota Prairie refinery in Dickinson, N.D. Those six collectively refined more than 1 million barrels of oil per day.
Thus, the U.S. started 2021 with its lowest annual refining capacity in six years, and that capacity did not expand significantly over the rest of the year. And as the pandemic’s effects on American life faded, month by month, demand for fuel increased — not just from drivers but from trucking and shipping companies, construction companies — remember, 98 percent of all energy use in the construction sector comes from diesel — and from airlines and other consumers of jet fuel.
Why are we experiencing these stunning fuel prices? Because we’re getting back to pre-pandemic levels of demand, while our refineries are pumping out about a million fewer gallons of fuel per day than they did before the pandemic. And you know what happens when you mix lower supply with higher demand.
Right now, someone is likely shouting, “Reopen those closed refineries, then!” But that’s not so easy.
The former PES refinery complex in Philadelphia is being demolished. The Shell refinery is slated to become an “alternative fuels complex,” and it’s a similar transition for the Tesoro refinery. The HollyFrontier refinery is already converted to processing biofuels, as is the Dakota Prairie refinery. (Certain environmentalists will denounce the greedy oil companies and praise the companies producing environmentally friendly biofuels, never stopping to check and realize that many of them are the same companies.)
Wait, I haven’t even gotten to the bad news: Chemical maker Lyondell Basell Industries announced in April that the company will permanently close its Houston crude-oil refinery by the end of 2023. That plant refines about 263,000 barrels of gasoline, diesel, and jet fuel per day.
We almost never build oil refineries in the U.S. anymore. According to the EIA, the newest refinery in the United States is the Targa Resources Corporation’s site in Channelview, Texas, which began operating in 2019 and processes 35,000 barrels per day. Before that, the newest refinery with significant downstream unit capacity was Marathon’s facility in Garyville, La. That facility came online in 1977.
Back during the late Bush and early Obama years, Hyperion Energy attempted to start a massive project in South Dakota, aiming to build what would have been the sixth-largest oil refinery in the nation. But the project grew mired in red tape and environmentalist opposition and eventually was canceled. We would have experienced widespread shortages of refined fuels many years ago if some companies had not completed large-scale expansions of existing refineries.
And so, President Biden’s fuming about oil companies not drilling and demanding they “use it or lose it” is something of a red herring; it would not do U.S. oil consumers a lot of good to dramatically expand the supply of crude oil if there isn’t enough refinery capacity to turn that oil into useful products. And right now, there are no major projects planned to build new oil refineries or expand capacity at the existing ones.
In short, successive administrations, consumers, and the cultural zeitgeist made it clear to the oil industry that their product did not have a future — and so oil companies reduced their investments at all stages of seeking out, drilling, obtaining, and refining their product. And no step in the process is cheap, as Tidal Petroleum lays out:
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The right to enter and drill on the property owner’s land is accomplished by obtaining a lease. The lease is subject to title search and proper recording in much the same way as real estate. Many times, the bonus for a mineral lease exceeds the value of the property itself. Between legal cost for title work and lease bonus wells see costs in excess of $1,000,000 for leasing alone.
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Construction of roads and drilling site is a major cost factor which can easily exceed $400,000 per location.
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Cost depend on the depth and complexity of the well. Modern horizontal well drilling costs can easily exceed $4,000,000 just in the drilling phase. Without drilling complications these wells generally take about 3 weeks for the drilling phase.
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Rig mobilization and assembly expenses vary depending on how far the rig must be transported, but generally run between $100,000 to $350,000.
In other words, at minimum, getting the rights to the oil and setting up the drill and the derrick is going to cost $4.5 million per field.
With massive costs of developing oil fields, oil companies that had been riding high until the pandemic became much more cautious in their capital expenditures. To make up for the current 1-million-barrels-per-day shortfall and the forthcoming closure of the Lyondell Basell Industries plant, we would have needed to have started building new refineries or expanding existing refineries years ago.
Bloomberg News summarizes our problem succinctly: “The U.S. can’t make enough fuel and there’s no fix in sight.” The magazine goes on to declare that, “The longer-term transition away from fossil fuels dims the outlook for demand, making companies unwilling to put up the billions of dollars needed to build new plants. Even resurrecting idled plants can be prohibitively costly at a time when construction and labor costs in the U.S. are booming.”
That article also notes that, “Phillips 66, for example, would have to spend more than $1 billion to restart its Alliance refinery in Louisiana that was shut after damage from Hurricane Ida, Bloomberg Intelligence estimates.” There simply isn’t any quick, cheap, or easy way to expand refinery capacity, and the Biden administration and environmentalists don’t like oil refineries in general.
With diesel so expensive, keep an eye on jet-fuel prices squeezing the airlines and prompting them to cancel insufficiently profitable routes. The EIA reported this week that, “East Coast jet fuel inventories declined to 6.5 million barrels the week ending April 8, 2022, the lowest for any week since 1990, when we began reporting weekly jet fuel inventories by region.”
ADDENDUM: I saw one or two folks speculating that John Fetterman’s stroke — that he is thankfully recovering from — could hurt him in today’s Pennsylvania Democratic Senate primary. Hey, remember when Bernie Sanders had a heart attack, and in the following weeks and months he rose in the polls?