US-based oil and gas trade groups have dismissed President Joe Biden’s criticism that the refiners were not supplying more fuel to make windfall profits, citing that the current problem is a result of many factors, including geopolitical developments like the Russian invasion of Ukraine and domestic issues like policy decisions of the government.
As petrol prices skyrocketed in the US on June 14, Biden pulled up oil companies to boost supply and criticised them for making “unacceptable” high profit margins at a time when citizens were grappling with record-high prices.
“Today’s situation did not materialise overnight and will not be quickly solved,” American Fuel & Petrochemical Manufacturers and American Petroleum Institute said in a joint statement.
The trade groups said that while the Russian invasion is undoubtedly exacerbating the situation, the current challenges are largely the result of high crude prices due to a supply-demand imbalance, logistics reshuffling as the world emerges from the pandemic, strong consumer demand, ban on Russian products, and policy decisions made at the federal and state levels over many years and by successive administrations.
According to reports, the US Energy Department is likely to meet the oil industry executives this week to discuss high gas prices.
Refining margins, the amount that refiners earn for turning every barrel of crude oil into refined products, have soared globally on the back of increasing demand for refined products. This has benefitted refiners who process raw crude into refined products and led to unusually high profits.
Last month, the UK announced it will levy a windfall tax on oil and gas firms on the huge profits they are making during the energy crisis with hopes to raise £5 billion that could help the government to reduce household bills. The government in the UK has faced pushback from energy majors who have threatened to scale down investments.
There have been speculations that other countries, like India, may also follow suit. But ONGC Chairperson and Managing Director Alka Mittal said in May that the government is not looking to impose any new tax on windfall gains.
“With a global energy crunch underway, much focus has been placed on crude oil supply and demand. Yet crude oil has no utilitarian value until it runs through a refinery and gets processed into fuels like wholesale gasoline, diesel, and jet fuel. Because of this, it is not an overstatement to say that energy security requires a strong refining sector,” the US trade bodies said in the report.
The letter highlighted that the refined products from crude are globally traded commodities, priced in a competitive global market. “Refined product prices are set by the marginal supply costs of bringing the incremental barrels of products to market. US refiners have been operating at historically high utilization rates and producing about as much product as they have over the past five years. Particularly on the East Coast, which has lost 70 percent of its pre-2009 refining capacity, incremental supplies have historically been imported from international markets to supplement domestic manufacturing. However, the cost of refining in other nations is currently higher,” the letter said.
The trade bodies said that US refineries are operating at or near maximum utilisation, many facilities have safely delayed projects and maintenance so as to not take production offline and instead continue to provide supplies and build inventories. About half of US refinery shutdowns are conversions to renewable fuel production, the letter said. They said that even if refiners could bring more refining capacity online despite these challenges, the result could be higher demand and higher costs for crude oil.
“Refiners do not make multi-billion-dollar investments based on short-term returns. They look at long-term supply and demand fundamentals and make investments as appropriate,” the traders said.
The letter stated that in support of the government’s initiative to “end fossil fuel”, the industry has responded immediately. But multiple federal agencies continue to make it more difficult to build and maintain energy infrastructure projects, whether traditional or renewable.