Rising gas prices may not be a problem of the Biden administration’s making, but they are a problem it cannot afford to ignore. People across the country are feeling their effects, with some groups like gig workers and those in the trucking industry – which has seen an increase in layoffs as gas prices have risen – suffering more acutely. In the face of these difficult conditions, it is essential that the Biden administration take decisive action to ease the pain people are feeling right now and, in the medium-term, address the structural factors that created this crisis.
First, it is necessary to accurately identify the causes of soaring gas prices. Many have suggested that insufficient drilling is to blame and have blasted the administration for failing to remove every existing obstacle to new permitting and projects. However, this argument fundamentally misunderstands structural changes in oil processing. In actuality, one of the biggest factors limiting supply is a lack of refining capacity.
The pandemic led oil refineries to reduce capacity by more than one million barrels per day. Now, the war in Ukraine has prompted the U.S. to suspend imports of refined petroleum products from Russia, further stifling supply while high gas demand has resumed. As David Dayen argues, consolidation in the petroleum industry must be regulated. No major refineries were built amid rapid consolidation among oil companies between 1977 and 2020. Additionally, compared to 2022’s first quarter, the largest eight independent refiners are expected to report a shocking 652% jump in average earnings per share in the second quarter. While Exxon Mobil earned an average of $853 million in profits during the second quarters of 2017-2019, it is expected to make $4.4 billion in this year’s second quarter.
However, reopening an idle refinery costs hundreds of millions of dollars and takes months. Furthermore, with the U.S. hoping to lower its reliance on fossil fuels and achieve 50% electric vehicle sales by 2030, the government would have to create incentives for refineries to increase gasoline production without earning long-term profits.
Steps the Biden Administration Has Taken
On June 14th, the Biden Administration sent a letter urging major oil refineries to expand their capacity for gas production. In the letter, Biden cited how refineries drastically reduced their capacity during the pandemic and, as a result, are enjoying hefty profit margins at the expense of regular Americans.
This approach reflects a novel effort to combat price gouging. On June 23rd, Department of Energy Secretary Granholm and oil refinery representatives convened at an emergency meeting to discuss gas prices. At the state level, California’s legislature commissioned an investigation into gas price increases and potential price-fixing by oil companies.
The Biden Administration has leveraged the Defense Production Act (DPA) to support clean energy projects and also stated that they are open to invoking the DPA to pay oil refineries to increase capacity. However, this goes against climate goals because the only way to get industry on board would be to guarantee that opening more refineries will be profitable in the long run. Since current refineries are running above 90% capacity, the Biden administration would have to fund the reopening of inoperative refineries or the construction of new ones. However, even Chevron CEO Michael Wirth has stated that he doesn’t “think you are ever going to see a refinery built again in this country.” Refineries are unappealing to investors and communities strongly oppose them due to their polluting effects.
There Are Other Options Available
So how can Biden remain faithful to climate objectives while increasing refining capacity right now?
Directly Operate Refineries: Kate Aronoff has proposed that the federal government establish a National Refining Company, which could “restart idle assets at a loss to meet the immediate challenge themselves,” then be shut down when capacity is sufficient. However, even if the federal government does step in, reopening existing refineries is difficult and may not be ready in time to meet current exigencies.
Find New Imports: Countries like China and India have significantly increased their refining capacity. Engaging in trade with these countries, who can tap into refineries already in operation, would enable the U.S. to meet demand quicker. However, although China is not utilizing one-third of its capacity and is enforcing strict environmental standards for refineries, it has been hesitant to expand exports of refined products because it is seeking to cut carbon emissions. Furthermore, refineries in China and India are already buying discounted oil from Russia.
Slow and Reverse Consolidation: The more consolidated the market, the more profit suppliers have to gain by keeping supply scarce than increasing supply. High concentration among refiners enables them to significantly reduce operating volume to optimize profits without providing adequate supply for the American people. This occurs because refineries can hold prices above competitive levels for longer with fewer firms, and maintaining tight supply gives refineries more opportunities to increase prices. To ensure refineries consistently meet consumer demand in the long run, the Biden administration must strengthen oversight over refinery consolidation and operations.
While reversing consolidation and creating a competitive market takes time, it is important to address the underlying structural issue. Blocking further consolidation can help ensure refineries do not obtain even more power to manipulate supply and, therefore, prices.
Concentration in the refining industry is not a new problem. Over the past several decades, petroleum refineries have been reducing their capacity and shifting to just-in-time business models. In 2005, the House held a hearing to discuss whether increased profits would spur investment in more capacity. In 2006, the Senate held a hearing to discuss the Refinery Permit Process Schedule Act, a bill that would streamline and expedite the ability to build new refineries. Additionally, in 2007, the Congressional Joint Economic Council held a hearing examining how the Bush Administration’s lenient stance towards oil refinery mergers was contributing to capacity reduction and increased gas prices. It is time for Congress to once again bring attention to suspect refinery behavior that has led to the current crisis in gas prices.
The FTC and the Department of Justice’s Antitrust Department (ATR) have previously blocked some concentration in the refining industry, and can be leveraged by the administration to thwart consolidation and establish industry stability.
In 2011, the FTC filed a consent order allowing the merger of Phillips Petroleum and Conoco Inc., but required both companies to agree to divesting refineries, propane terminals, and natural gas gathering facilities to ensure competition in the gasoline refining market. And on September 9th, 2021, the FTC requested information from HollyFrontier Corp. and Vertex Energy Inc., two energy companies that operate refineries. HollyFrontier is waiting for regulatory approval to take over Sinclair Oil Corp., and Vertex has agreed to acquire a Royal Dutch Shell Plc refinery. Currently, a case involving EnCap/EP Energy, in which the FTC is seeking to require EP Energy to divest its entire business and assets in Utah, is pending. This divestiture would resolve FTC allegations that EnCap Energy Capital Fund XI L.P.’s acquisition of EP Energy would prevent competition in Uinta Basin waxy crude oil sales for Salt Lake City refiners. The FTC has cited that this merger would increase refined product prices.
ATR’s civil program seeks to preserve competition for refinery process chemicals in the oil industry. For example, in United States v. General Electric Co. and Baker Hughes Incorporated (2017), the DOJ ATR Division protected competition in the market for refinery process chemicals by filing a proposed final judgment requiring GE to divest its Water & Process Technologies business unit, which included its refinery process chemicals and services unit.
The average price of gasoline has fallen to $4.36 per gallon from a peak of $5.02 in mid-June, largely due to falling demand. While the U.S. refining crack spread has also dropped from $60 in June to $39, this figure still exceeds normal levels. The latest increase in gas prices demonstrates—more than ever—that de-consolidation is crucial to reducing gas price volatility. Emergencies related to public-health, climate change, and international entanglements are bound to affect gas prices in the future. The Biden administration must commit to establishing resilience in an industry so central to American’s daily needs.
This post will continue to be updated as the administration’s response develops and as we become aware of additional actions that could provide relief.