00:00According to GasBuddy, Americans are paying nearly three-quarters of a billion dollars more today
00:04versus one year ago, and that's thanks to higher gasoline and diesel prices.
00:08With us now is Patrick DeHaan, head of petroleum analysis for GasBuddy.
00:11Patrick, great to have you with us once again, and I wonder if you could kind of set the stage
00:14for what we're seeing right now. Obviously, people driving around, seeing those high prices
00:19at the pump for, yes, gasoline, diesel as well. We noticed that the workhorse fuel here for the
00:24U.S. economy. What is causing this most broadly? What do you tell folks when they're wondering
00:28what's up here? Is it just this war in Iran? No, it's certainly very, very complicated. I don't
00:34think there's been a year in my career where we've seen so much being so impactful to both those
00:38prices in all in different ways. It's very complex, and right now I think what a lot of Americans look
00:43at is in some places you can still find a $3.99 gas price, but what is crazy about seeing
00:49that
00:49is next to that $3.99 price, you might see a $6.19 price for diesel, and there's, of course,
00:55a lot of social media rumors. I think if we split this down, and again, new Russian refineries
01:00being attacked overnight, that is where we're seeing more of an impact on the price of diesel
01:04is Ukraine has found a very effective way of taking it home to Russians by knocking these
01:10major refineries offline, and that's created quite a bit of a problem. Russian refineries,
01:16Russia itself produces a lot of heavy oil, which produces a lot of heavy products like diesel.
01:20So on that side, the Ukraine-Russia situation is impacting diesel more broadly, and then we also
01:27have the Middle Eastern refineries that could potentially step in. Some of the newest refineries
01:31in the world are stuck behind the Strait of Hormuz, and now we have the East-West pipeline to contend
01:35with as well. So we're getting hit on the foundation for the price of oil, gasoline, and diesel all in
01:41a
01:41slightly different way. It's very complex.
01:44Can you talk to us also about production capacity versus refining bandwidth? Because it's not just
01:51about the amount of oil, right? It's about the infrastructure you have to turn it into gasoline,
01:56to turn it into diesel, to turn it into the product that we ultimately use in our daily lives.
02:01That's exactly right. I mean, crude oil is worthless unless it's refined into something,
02:05and that is the choke point that many Americans are now discovering, is that oil doesn't necessarily
02:10dictate to a one-on-one relationship with the price of products that comes out of that refinery,
02:16and that is the choke point. So, you know, as we've seen a loss in U.S. refining capacity over
02:21the last few years for myriad reasons, including California losing two refineries, we've seen
02:26COVID-related refinery shutdowns, just a lot going on there. We haven't really added a lot of new
02:31refining capacity in a meaningful way over the last few years. Now, refineries are adding
02:36incremental increases, but therein lies the problem. And in Europe, they've been shutting
02:41down refineries as well. Kind of the same thing with nuclear power plants. And of course, now,
02:46when refineries are in such demand, there may be some revisit of those decisions. But more broadly,
02:52the oil is not as much of the concern, especially with China cutting the amount of oil it's importing.
02:58But on the flip side of that, that also means that China's refineries, by the way, China has more
03:03refinery capacity than the United States does. That cut of oil purchasing from China then means
03:09that they're also not refining as much. So that's problematic in a different way as well. What helps
03:13the price of oil go lower, with China not buying huge sums of oil, actually hurts gasoline and diesel
03:20prices. And that's a bit of why we're having this disconnect. While the price of oil is, you know,
03:24$95, $100 a barrel, that's not apocalyptic. But diesel prices are at all-time records,
03:30and it's all this constraint with refining. Patrick, I go back to what we heard from Real
03:34Macros. Jeff Curry on our air, he talked about running out of optionality when it comes to these
03:39refiners. And I wanted to ask you a bit about that, sort of how quickly a refiner can ramp up
03:44more,
03:45can change from diesel to gasoline. We were talking yesterday about turnarounds, how we're facing the
03:50prospect here of the seasonal, the time of year when these refineries often shut down or scale back
03:55to replace parts and get themselves in shape for the seasons ahead. How much optionality is there
04:01in the refining system as you see it? All right, now there's not much breathing room. As you mentioned,
04:07I'll start on the maintenance and turnarounds. This is kind of the off-peak, the shoulder season,
04:11when temperatures are still warm enough where refineries can do work because refineries are
04:15outdoors exposed to the element. No workers really want to get out there at the height of December,
04:19January, and February. So refineries have two seasons to do this work. It's after summer and
04:25basically before summer. And now we are seeing some major shutdowns. Now some refineries have
04:29deferred maintenance, pushing as hard as they can because obviously crack spreads are very high.
04:35So refineries want to take advantage of this environment. But in some instances, this work is
04:39so large and so planned that some refineries simply can't defer maintenance, such as the case with
04:45the largest refinery in Canada right now, undergoing about two and a half months of a
04:49complete shutdown. That's relatively rare as well, but they're also doing some major work. So
04:54right now, U.S. refineries are already operating at 98%. That's about some of the highest rates we've
05:01ever seen. In fact, going back to 1999, that's the last time we've seen refineries pushing
05:06the accelerator this much. So there's not much more bandwidth to do more simply because we're at
05:12capacity. But there is incremental increases happening. Refineries do the process of what's called
05:17de-bottlenecking, where they may try to increase efficiencies. That might net them a few percentage
05:23points of additional capacity, but sometimes those can be very expensive. And then your other point,
05:28the main problem here is just the chemistry in oil, is that a lot of refineries are set up to
05:34process
05:34certain types of oil. And so that yield that you were talking about, how much gasoline and diesel you
05:40get out of the barrel of oil, that's something refineries can tinker with in maybe the low percentage
05:44points. They can get a little bit more diesel, a little less gasoline. But those ratios all go
05:49back to the type of oil that they are refining to begin with. They may have more control. Some
05:54refineries are less complex, so they may not have as much control over that dial.
05:59You've seen the president take action in Venezuela in this kind of complicated deal that he struck with
06:05some American companies and the interim government there with the idea that more oil will lower prices.
06:12But if you were advising the U.S. government, if you were advising the president,
06:16should the U.S. government be focusing on refining capacity rather than the raw products
06:22on a shorter timeline?
06:24I mean, absolutely. It was really lousy seeing California follow through those two refineries.
06:31Governor Newsom maybe tried some things to keep those two California refineries online, but
06:36so much of the focus has been on oil, and that obviously isn't going to help right now.
06:41You could have all the oil in the world parked in the Gulf, and that might reduce oil prices slightly,
06:45but that doesn't mean more oil is going to be suddenly flowing out of U.S. refineries tomorrow.
06:50So, you know, we've lost a few refineries. It's been a very boom-bust sector, and that's why oil
06:56refineries haven't gotten much love, because traditionally, it hasn't been a high-margin business
07:01at all. Of course, now it's extremely lucrative, but you can't build refining capacity overnight.
07:06And that's where some of these global refineries, such as the Dangote refinery in Nigeria,
07:11talk about just perfect timing. They've been building it for 10 or 15 years,
07:15and now they're finally hitting their stride.
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