The Real Culprit Behind the Gasoline Supply Crunch

COMMENTARY Coal, Oil, Natural Gas

The Real Culprit Behind the Gasoline Supply Crunch

Jun 24, 2022 3 min read
COMMENTARY BY
Derrick Morgan

Executive Vice President

Derrick Morgan is the executive vice president of The Heritage Foundation.
U.S. President Joe Biden reacts to a question from reporters on June 23, 2022 in Washington, D.C. Drew Angerer / Getty Images

Key Takeaways

Biden, like many others on the left, has made no secret that he wants to end all fossil fuels, especially oil.

Let’s hope the companies bluntly tell the president the truth: They are reducing capacity largely because of bad public policies that he supports.

What rational investor would make huge investments in an industry the White House says it wants to destroy and that Wall Street, at best, halfheartedly defends?

Calling the gasoline supply crunch “Putin’s price hike” hasn’t worked for President Joe Biden, so now he’s trying a different tactic: blaming oil companies. His June 15 letter to seven major refiners complains about profit margins and a lack of supply in the U.S. market. But this is a little like Will Smith complaining that his hand hurt after slapping Chris Rock. Truthfully, Biden shares much of the blame.

Biden, like many others on the left, has made no secret that he wants to end all fossil fuels, especially oil. Of course, crude oil is practically worthless until it's refined and turned into gasoline, diesel, jet fuel, and other useful products. Noting that pump prices are increasing even above the cost of crude oil, the president wants answers. The fact is, the U.S. refining industry has lost about 1 million barrels per day of refining capacity over the last few years, and with the return of demand post-pandemic, there is a supply crunch.

Yet even as Biden says he may use “all reasonable and appropriate Federal Government tools and emergency authorities to increase refinery capacity and output in the near term,” his administration has taken multiple steps that have the predictable effect of decreasing supply of fuels by decreasing refining capacity. Yes, the pandemic took a toll, and yes, some of his bad policies were also pursued by others, but Biden and his allies are largely at fault for the tight supply environment.

He has repeatedly talked about ending the fossil fuel industry as the primary way to reduce emissions. When the president of the United States promises the extinction of entire industry classes, investors notice. Any prudent company would consider the government’s regulations in making investment decisions, particularly since refineries require huge upfront investment and long pay-back periods.

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The companies that Biden is requiring to explain “any reduction in your refining capacity since 2020” are the very same ones he and his allies have been pressuring to reduce their emissions by reducing production. The Securities and Exchange Commission in June closed its comment period on rules that will require every public company to disclose (confess?) its climate impact—up and down its supply chain. The only way to reduce emissions on the scale the administration wants (50 percent by 2030, 100 percent by 2050) is to eliminate the demand for products that come from fossil fuels, including oil and derivative products.

Let’s hope the companies bluntly tell the president the truth: They are reducing capacity largely because of bad public policies that he supports.

Another government-supplied monkey wrench: the renewable fuel standard. Started in 2005, the RFS requires increasing the amount of ethanol in the nation’s gasoline supply, even past the 10 percent envisioned by Congress. Cars were not made to run on ethanol, and once the requirements passed the 10 percent barrier that most cars can handle, the program got incredibly expensive.

Worse, the RFS hits independent refiners, who tend to be smaller and less profitable, hardest. In the past, some have pointed to the RFS as the reason they have closed. Incredibly, Biden recently finalized new RFS rules that increase the biofuel requirements to all-time highs, increasing compliance costs. What happened to “first do no harm,” Mr. President?

Other biofuel boosting programs like California’s low carbon fuels standard and the federal biodiesel tax credit combine with RFS to cajole massive investments in renewable diesel facilities, many by major refining companies. Thanks to these carrots and sticks, renewable diesel has become highly profitable (and unlike other lower carbon fuels, indistinguishable to the final customer). Refiners have responded to the policy. The problem is, companies are converting refineries to biofuel plants with significantly lower capacity. Take the Martinez refinery in California. Before conversion to biofuels, its capacity was more than 160,000 barrels per day. After conversion, it will produce only 48,000 barrels per day. At least four plants are making such a conversion.

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Such conversions and investments, costing billions of dollars, are made with decades-long time horizons in order to get a return. What rational investor would make huge investments in an industry the White House says it wants to destroy and that Wall Street, at best, halfheartedly defends?

The solution is simple—reverse these policies, stop trying to destroy a great American industry, and free Americans to produce, refine, and supply their neighbors with the fuel they want and need.

This piece originally appeared in The Sacramento Bee