Saturday night, Ukraine attacked the Kapotnya refinery in Moscow. At a time when the supply chain is already stretched, the news is extremely unwelcome. Here are some things we can do to mitigate increased energy costs.
If you have bothered to fill up a diesel tank lately you cannot help but notice that things have gotten really expensive. Diesel is selling at all-time highs, with the national average about $6.30 per gallon. California is even worse, averaging $8.00 per gallon. Ships, trucks, and trains rely heavily on diesel and if it gets more expensive, nearly everything else does.
The average tank size for a full-size pickup is 30 gallons, so the cost to fill it has gone from $105 to $189. A tractor-trailer with two fuel tanks holds 300 gallons, which would cost a whopping $1,890. Because tractor-trailers average about 7 miles per gallon, the cost of a cross-country long haul from New York to Los Angeles (2,800 miles), has gone from $1,400 to $2,600.
Oil is a global commodity, and events occurring across the globe can conspire to affect prices. Factors can include conflict, mechanical disruption, tariffs, logistical issues, and regulation.
Fortunately, the oil business is relatively simple to understand. You take crude from the ground, ship it to a refinery, refine it, ship it to a retailer, and then sell it. But bottlenecks can occur. Believe it or not, today the issue is not a lack of crude. There is plenty of that. Instead, the issue centers on a relative lack of refining capability due to a series of concurrent, unfortunate events.
Refinery Capacity
This issue has been a long time in the making. Since 2020, 11 domestic refineries have closed or been “repurposed to renewables,” representing a loss of production of about 900,000 barrels a day. Remaining refineries have limited capacity to pick up the slack, so if another is lost, it is difficult to mitigate the price damage that results.
It doesn’t help that the last U.S. refinery with significant downstream unit capacity was built in 1977.
Internationally, refineries in Dalian, China (410,000 barrels a day), Grangemouth, United Kingdom (150,000 barrels a day), and Wesseling, Germany (150,000 barrels a day), have been sidelined due to either a prior lack of demand or a desire to migrate to sustainable fuel.
Making matters worse, before this week’s attack on Kapotnya, Ukraine has already destroyed three of Russia’s largest refineries (Kirishi, Syzran, and Saratov) and degraded another two (Volgograd and Norsi) to 25 percent capacity. This represents a reduction of more than 1 million barrels a day. Kapotnya had produced around 240,000 barrels a day.
Also, it doesn’t help that the Exxon refinery in Joliet, Illinois, has been offline for a week because floodwater overwhelmed the plant. It had been expected to resume production this week, but as of now, it has not. This represents a loss of 275,000 barrels a day.
Good logistics managers are already doing what they can to consolidate loads, shorten routes, and maximize mileage. Every penny they save drops to their bottom line, so asking more of them is unlikely to help much.
Banning Exports
Banning diesel exports would provide very short-term relief, but create shortages internationally, which would actually lead to higher prices, given that diesel is a global commodity. Additionally, there is only so much shipping capacity, so that would be creating another bottleneck.
So what can be done? Clearly, this is not a problem that lends itself to quick solutions. Having said that, understanding that high prices are caused by the bottleneck at the refinery level, and is not due to supply, presents a few short-term solutions that will lessen the pain.
The obvious ways to mitigate the issue are to repair Joliet as soon as possible, seek to recommission idle plants, and use political pressure to get Ukraine to stop attacking Russian capacity.
The Joliet issue will be resolved as soon as the necessary repairs are performed. This is important because of the location of the refinery, which allows it to inexpensively feed several Midwest states.
Recommissioning Idle Plants
Right now, there are a few “idle” refineries (New Jersey and Nevada) that if engaged would combine to produce about 25,000 barrels a day. It would be relatively easy and quick to put them back into operation.
There are also four U.S. refineries that are listed as closed, but could reopen if business owners and regulators worked together (Benicia, Los Angeles, Houston, and Belle Chasse). They could produce around 750,000 barrels a day. These actions would mitigate a significant portion of the shortfall. At this point, every gallon is valuable.
It is imperative that whatever we do, we do it quickly.
Employing these strategies will help slow the continued rise in fuel costs and potentially give Americans a little relief. They can be implemented with little taxpayer cost, almost no federal legislation, and end up putting the United States in a better strategic position going forward.
