Cracks are everywhere, not just refinery spreads
Forgive me if you’ve heard this one before. “We are going to eliminate fossil fuel use!” “I charge my EV using solar panels on my house, I don’t need no stinking fossil fuels.” “We have reached peak demand and we don’t want to see any more investment in oil and gas wells.” “We need a windfall profits tax of 21% on profits over 10% because unless you are Google, Meta, Moderna or really any other company on earth that contributes to my campaign, you aren’t allowed to make money.” “Why are prices so high?!? You have to increase production and refining!!!”
Inflation is transitory.
The vaccine will stop COVID.
Climate change is the biggest threat of our time. It’s an emergency.
If you are like me, you are frustrated. It feels like the lunatics are running the asylum and every time someone in Washington opens their mouth, you die a little inside. What we lack is real discussion and insight into the problems, the causes, and prospective solutions.
With credit to Javier Blas in response to Joe Biden’s letter demanding refiners produce more diesel and stop making profit, I offer up what should be mandatory reading for all citizens on planet earth.
Third, and perhaps most importantly, refining capacity has declined where it matters for the market now, and the plants that are operating are struggling to process enough crude to satisfy the demand for fuel. Martijn Rats, an oil analyst at Morgan Stanley, estimates that outside China and the Middle East, oil distillation capacity fell by 1.9 million barrels a day from the end of 2019 to today — that’s the largest decline in 30 years.
The downward trend started well before the pandemic hit, as old Western refineries struggled to compete, environmental regulations increased costs and the unfounded fear of peak oil demand amid the energy transition prompted some companies to close plants. The fuel-demand collapse triggered by Covid-19 only turbo-charged the trend, resulting in dozens of refinery operations shutting down for good in Europe and the U.S. in 2020 and 2021. New capacity has emerged in China. However, Beijing tightly controls how much fuel its refiners can export so that capacity is effectively out of reach of the global market.
Fourth, are the sanctions and unilateral embargos — also known as self-sanctions — on Russian oil. Before the invasion of Ukraine, Russia was a major exporter not just of crude, but also of diesel and semi-processed oil that Western refiners turned into fuel. Europe, in particular, relied on Russian refineries for a significant chunk of its diesel imports. The flow has now dried.
Europe not only needs to find extra crude to produce the diesel and other fuels it’s not buying from Russia, but, crucially, it needs the refining capacity to do so, too. It’s a double blow. Oil traders estimate that Russia has shut down 1.3 million to 1.5 million barrels a day of refining capacity as result of the self-sanctions.
We have a massive food crisis coming which will make the diesel shortage look like child’s play. Demand isn’t going anywhere (unless you are poor), so supply is the only lever, short of energy lockdowns. The sanctions on Russia must end, or the cracks will spread and refining will be the least of our worrie. Until then, Exxon will continue to “make more money than God” because American politicians don’t understand the supply, demand or the unintended consequences of regulation.
Also, the cost of nat gas in Europe is 2-3X that of the US, so the downstream industries can't make money even at the nosebleed prices in those markets. More crude and capacity won't help if their other costs are uncompetitive. In spite of the capacity closures, the US is still long diesel and gasoline - we're exporting to Europe as long as the "arb" between the 2 markets covers the cost of shipping. In addition, some refineries are at reduced capacity b/c they are modifying to make "renewable diesel". That will add to the pressure on food prices as they try to find enough feedstock to go green. And, at least 2 other large plants are either in turnaround or doing repairs due to operating upsets. When you've had no people to work in your plant due to COVID and no margins to pay for repairs due to low crack spreads things don't always work smoothly.
Basically, in the real world things don't cycle up and down the same way the stock charts do. There's a lag, often a big one, while stuff has to happen. Solving the wrong problem will make things worse later on. As an example, encouraging bitcoin miners to come use up your "excess" wind and solar power instead of building out the grid to tie it into the lines that feed major cities, or making something that most people actually use isn't exactly helping. But the Texas pols also know that presenting the trapped users of ERCOT grid infrastructure with a big bill to do this on top of their massively higher electric bills won't be very popular this year.
i agree with everything you say except when you say these are un intended consequences of regulations.
I grew up in Nigeria. Nigeria has had ZERO local refining capacity since as far back as i can remember (government run refineries never produced a drop of refined product) . despite being one of the leading exporters of crude oil practically all refined products are imported.
When LNG export terminals were built in the late 1990's and Early 2000's no one ever gave a thought to piping some of the gas to a power station so that we could have a stable power supply in the country. Nigeria was exporting LNG while electricity was being rationed as a matter of routine on a daily basis.
When the Lagos state government (Lagos is the wealthiest and most populous state in Nigeria) wanted to build a power station in the early 2000's, the federal government stopped them on the grounds that constitutionally the Federal government had the sole right to manage the energy sector of the economy (you should look up the Nigerian constitution. its a progressives dream and it does actually stipulate that the federal government has a monopoly on major sectors of the economy) . Meanwhile energy rationing remains the norm across the country
Those are just two examples indicating how the government deliberately shut down or mismanaged projects that would improve peoples lives.
The collapse of basic infrastructure is an outcome desired by leaders of third world countries to hurt and impoverish the population, make them more dependent and easier to manipulate and control .
For whatever reason America's leaders have committed to destroying America in thesame manner . I believe its been going on for a long time, but now with crazy policies justified through COVID hysteria and climate change its, no longer in the realm of conspiracy theory to claim that America's leaders are committed to undermining the country's founding principles of constitutionally limited government and replacing it with a third world style communist or fascist dictatorship.