Emergency Diesel Reserves Release Highlights a String of Bad Decisions
Idled refineries and ban on diesel imports combine to put us in a huge bind.
News reports reveal that the White House is mulling the release of diesel from emergency reserves in order to address price increases and supply outages on the East Coast. They have prepared an emergency declaration to allow for quick release of some of the 1 million barrels (42 million gallons) of the Northwest Home Heating Oil Reserve.
The Wall Street Journal article outlined the problems causing this crisis:
Diesel prices have been rising around the world as economies have rebounded from the Covid-19 pandemic, several refineries have closed and Western countries have attempted to curtail imports of Russian energy. Crude and gasoline prices have been on the rise, too, but diesel has outpaced them because of the refinery closings and because Russia was such a big supplier of refined fuels into Europe, causing ripple effects world-wide.
Supplies are particularly tight along the U.S. East Coast where inventories have dropped to their lowest level since at least 1990. U.S. average retail prices for ultra-low-sulfur diesel rose more than 37% in just 10 weeks after Russia’s invasion of Ukraine, setting a new nominal record of $5.62 a gallon in the week ended May 9, according to the U.S. Energy Information Administration.
Refinery Closings
Of the two reasons for our dilemma mentioned above, refinery closings appear to be the main culprit.
In this MarketWatch report we see the extent that closed refineries have had on fuel production:
U.S. refinery runs now are at 15.7 million barrels a day compared to the 2015-19 average of 16.4 million, Mr. Smith said. "Refiners have just not been producing as much and have not rebounded to pre-pandemic levels."
The reason the refinery runs are so low is we have lost 4.5% of our refining capacity.
Refiners suffered deep financial losses during the pandemic as demand for fuel crashed during lockdowns. Five refineries permanently shut down. Marathon Petroleum shut down 3 refineries, while Shell and HollyFrontier each shut down one. Marathon is converting 2 of the shut down plants to produce renewable diesel. HollyFrontier is also converting it’s idled refinery to renewable diesel.
With these five refineries offline we have somewhere around 30-35 million fewer gallons PER DAY than before the pandemic. Estimates are that the refinery conversions to renewable diesel will be completed sometime in 2024. Meanwhile, that capacity is gone.
Curtailment in Russian Imports
The other reason we are in this situation is the ban on Russian fuel imports.
Bloomberg reported in February, before Russia invaded Ukraine how dependent we had become on Russian diesel imports.
The U.S. is drawing more diesel from Russia this month (Feb 2022) than it has in at least three years as cold weather envelops the Northeast.
About 1.55 million barrels of diesel is en route from Russia to the U.S. for February arrival, a record in data going back three years, according to oil-data provider Vortexa. So far that represents 22% of the nation’s diesel imports in February.
That’s 65 million gallons of diesel we imported from Russia in February. Not only do we now have a ban on Russian imports, but Europe has also been scrambling to replace diesel supplies they once acquired from Russia.
It is very unfortunate that we have lost the refining capacity that we so desperately need today.
Reasons for Refineries Closing Permanently
Why would five refineries close permanently if we so desperately need them? I’m glad you asked. Here are some observations that I believe led to this chain of events:
Underinvestment - Repairing refineries is an enormous investment that requires some certainty that the company will be able to benefit from the investment for many years. There has not been much certainty for refiners lately with so many governments pushing policies to shift away from fossil fuels. It would be foolhardy to spend a fortune repairing a refinery only to have excess capacity in a few years due to the electrification of all vehicles.
The ESG movement has been putting enormous pressure on oil companies to demonstrate their green credentials. By converting refineries to renewable diesel instead of repairing them for continued processing of crude oil, these companies can try to placate the ESG movement.
Enormous government subsidies from the Federal government and from California enticed these companies to make the conversion. When the two governments are offering $1.83 per gallon in subsidies, it makes it hard for these companies to walk away. This way they can prove their green credentials and take in a lot of income from tax payers.
Renewable Diesel Fiasco
In February I wrote about the impossibility of supplying all the soybean oil required to feed all these new renewable diesel refineries. In fact, a study has shown that less than half of projected U.S. renewable diesel output is likely by 2025.
“The Energy Information Administration estimates renewable diesel production capacity in the US could increase fivefold by 2024 from 1 billion gallons currently to more than 5 billion gallons per year.” However, consultancy Cerulogy released a study in January contending that the estimated projects were more likely to produce only 2 billion gallons by 2025, which means over 2 billion gallons of announced capacity will be delayed, cancelled or downsized.
In order to meet EIA predictions we would have to rely heavily on imported feedstocks and “a very significant reduction in the production of biodiesel - a biofuel made from similar feedstocks but blended with petroleum-based diesel.” Meeting the EIA forecasts would add 17 million metric tons of demand for fats, oils, and greases, increasing soy oil production and raising vegetable oils imports. There are concerns the increased demand for the oils needed will result in deforestation and the plowing up of grassland and rangeland. Of course, it will also cause food prices to rise.
Evidently the EPA is waking up and is highlighting the risk of negative market impacts, and environmental impacts if the supply of biomass-based diesel is further increased.
As I mentioned in the my February post, there isn’t enough farmland in the US to supply these renewable diesel refineries.
Evidently, these companies did not do their homework and just went after those government subsidies.
Conclusion
The fact is refineries that we desperately need are closed. Refiners will not invest in new capacity if the government and ESG activists are threatening to prevent the refiners from recouping their investment on upgrades. We need the government to make policies that will give companies the confidence to invest.
If over half the renewable diesel plants under construction never produce, that will be an enormous waste of resources. We must insist that our government does not subsidize enterprises that have no chance of materializing. It is a huge waste of taxpayer funds on top of the squandered resources on the part of the refiners.