Emily Pickrell, UH Energy Scholar
A summer of $5 per gallon gas has made the refinery business a very lucrative proposition, at least in the short term.
Yet while demand has been tight, concerns about climate change and societal push back against fossil fuels have made it difficult to build new refineries, even as U.S. and international demand for refined products continues to grow.
The uncertain future of gasoline in today’s policy discussions is one reason for a lack of investment, even in the recent $5-or-more gasoline price climate.
Initiatives like the Biden’s administration’s goal of electric vehicles making up 50% of auto sales by 2030 have done little to dispel this uncertainty.
So far, gasoline production has remained stable. In the first six months of 2022, the U.S. produced 19 million barrels of refined products per day, according to data from the U.S. Energy Information Administration. That’s up slightly from the 18.6 million barrels per day average in 2021.
Yet prices still went haywire earlier this summer. Recovering post-pandemic travel growth has spiked international demand for gasoline and related products. Coming in the face of a boycott of Russian crude oil, the supply/demand imbalance has pressured prices higher.
MORE FOR YOU
The U.S. capacity to meet this growing demand is limited. Refineries cost billions to build or retrofit for expansion. In the current high gas price environment, they are cash cows. Yet when gasoline prices are low, as was the case just two years ago, they run on razor-thin profit margins.
“The real question for refineries right now is whether to invest billions of dollars on retrofitting them,” said Paul Doucette, the hydrogen program leader at the University of Houston and former energy transition executive and general manager at Baker Hughes
. “You ask yourself, can I make money over the next 40 years? The market is telling you that EVs are becoming more popular, that pressure to reduce emissions are more severe, that carbon prices or taxes may be coming in the near future, and that environmental justice community may not want you there.”
Philadelphia Energy Solutions, for example, made the decision in 2019 to close its 335,000 barrels per day operation after a fire. Repairing the refinery would have been a huge investment. But at the same time, the refinery had long been a source of contention with local residents. The pushback invariably factored in to the decision to permanently close the facility.
The loss of these refineries has had a cumulative impact. In 1982, there were 27 operating East Coast refineries with 1.8 million barrels per day capacity. By 2022, this number has dwindled to seven facilities with 800,000 barrels per day capacity.
The same pattern is taking place across the country.
The Shell refinery in Convent, Louisiana shut down in 2020, removed another 211,146 b/d capacity. So did Marathon’s 161,000 barrels per day refinery in Martinez, California. And the 48,000 b/d HollyFrontier refinery in Cheyenne, Wyoming, the 27,000 b/d Western Refining refinery in Gallup, New Mexico and the Dakota Prairie 19,000 b/d refinery in Dickinson, North Dakota.
And if older refineries are shutting down because the economics don’t make the investment seem worth it, new refineries are not being built and haven’t been built for several decades. The tremendous hurdle to get regulatory and environmental approval jacks up the price tag.
One big challenge is getting past the lawsuits that accompany the approval process.
“If I was trying to toss a grenade to slow down a new refinery or a major expansion, I would look for federal approvals that trigger a requirement to prepare an environmental impact statement,” said Tracy Hester, an environmental law professor at the University of Houston’s Law Center. “Even if you can’t stop a refinery project outright, you can slow it down and effectively kill it with a thousand paper cuts.”
The planned $3.8 billion expansion of a BP Whiting refinery in Indiana, for example, met with considerable opposition from the National Resources Defense Council and the Sierra Club, which jointly sued the U.S. Environmental Protection Agency over how particulate matter emissions would be regulated.
Environmental pressure, such as emissions targets, is also working to pressure companies to reduce their fleets.
This is not to say that all the environmental concerns are without merit.
Local pressure has also come from communities of color. They have historically shouldered a disproportionate share of the environmental damage from refineries and other heavy industry.
Many of the community objections to existing refineries are rooted in historical environmental discrimination whose impact persists to date.
Black Americans are 75% more likely than other Americans to live in neighborhoods adjacent to refineries, according to a study by the Clean Air Task Force and the National Association for the Advancement of Colored People.
And living near the kinds of environmentally damaged sites that refineries can create can take a year or more off of life expectancy, according to a 2021 study by University of Houston researchers that looked at the impact of Superfund sites on life expectancy.
Yet lax oversight of regulations for refineries has contributes to the problem. In Philadelphia, The EPA found that the refinery had been out of compliance with the Clean Air Act nine of the past 12 quarters through 2019 prior to its closure, with relatively small penalties.
The Biden administration has acknowledged the need for these communities to share in the economic benefits of heavy industrial projects with its Justice40 Initiative, to at least counterbalance the heavy price they have paid.
And as part of the push for Biden’s big climate legislation, key members in Congress appear to have made commitments to passing permitting-reform legislation later this year that may benefit (and lower the cost of) new refineries.
It’s a start, but more logical and collaborative thinking will be needed by all participants, given that by 2040, EVs are expected to still only make up about one-third of all cars on the road.
All this means that refineries will be necessary for years to come. What is also needed is both vigorous environmental regulatory oversight and a reasonable permitting process, so that both refineries and communities have a fair say in what they can expect.
Emily Pickrell is a veteran energy reporter, with more than 12 years of experience covering everything from oil fields to industrial water policy to the latest on Mexican climate change laws. Emily has reported on energy issues from around the U.S., Mexico and the United Kingdom. Prior to journalism, Emily worked as a policy analyst for the U.S. Government Accountability Office and as an auditor for the international aid organization, CAR
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.