With America’s allies in Europe desperate for U.S. oil and gas due to sanctions on Russia for its invasion of Ukraine, Energy Secretary Granholm has asked seven major refiners to reduce their exports. The need to reduce petroleum exports is supposedly due to low levels of gasoline and diesel inventories on the East Coast. Gasoline stocks there are at a near-decade low, and diesel stocks are nearly 50 percent below the five-year average across the region. But, Granholm has done nothing to help oil companies and refineries to be able to produce more or to easily get supplies to the East Coast. For instance, because of the Jones Act, which requires goods moved between U.S. ports to be carried by ships built domestically and staffed by U.S. crews, traders are sending unfinished gasoline components from the Gulf Coast to the Bahamas, where they are blended into finished gasoline to be sent to the U.S. East Coast. Nor has Granholm taken any action to get idled refineries to come back on line, or keep more refineries from closing, or to encourage new refineries to be built. Further, she has done nothing to get the Interior Department to hold oil and gas lease sales or increase the rate of drilling permit approvals on federal lands. That would run counter to President Biden’s “all of government” approach to restricting fossil fuels.
Granholm’s Letter
Granholm writes to the 6 major refineries, “Given the historic level of U.S. refined product exports, I again urge you to focus in the near term on building inventories in the United States, rather than selling down current stocks and further increasing exports. It is our hope that companies will proactively address this need. If that is not the case, the administration will need to consider additional Federal requirements or other emergency measures.” To be clear, she is threatening government actions to act against refineries if thy fail to comply with her wishes.
The Biden administration is worried about fuel storage levels heading into hurricane season when Gulf Coast refineries may be damaged and have to run at lower capacity or shut down temporarily. A refinery outage could cause fuel prices to spike before the November election. Average gasoline prices nationwide fell to $3.869 a gallon from about $5 in mid-June. Biden is taking the credit for lower gasoline and diesel prices due to his release of oil from the Strategic Petroleum Reserve, which is now at a 37 year low. The news media is telling Americans that Biden is doing all he can to reduce prices without noting that Americans are driving less due to high prices for fuel and inflation affecting everything or that oil prices have been falling due to lower global demand, principally from COVID lockdowns in China.
Restricting fuel exports is one more counterproductive Biden policy on fossil fuels that would actually tend to increase global fuel prices, including U.S. oil and petroleum import prices, due to reduced global supply. Granholm must be forgetting that Biden promised to help our European allies, who are trying to diversify energy sources away from Russia that had accounted for 40 percent of Europe’s oil imports. Due to exceedingly high natural gas prices in Europe, some manufacturers and power generators are turning to diesel as a substitute for natural gas.
The Real Problem
The real problem is the political and regulatory assault on U.S. oil production and refining. Due to regulatory issues, in 2019, the Philadelphia Energy Solutions refinery that produced about 335,000 barrels a day of refining capacity was closed, which made the East Coast more dependent on Gulf Coast and overseas refineries. Also, because of New York State’s natural gas pipeline blockade and ban on hydraulic fracturing, more fuel oil is being used to heat homes in the Northeast making home heating compete for oil supplies with transportation fuels. One-third of New England residents currently use oil to heat their homes. Also, with New York’s closure of the Indian Point nuclear power plant and its natural gas pipeline blockade, New York had to increase its oil generation by 150 percent during the first 6 months of this year compared to the same time last year. Other examples of Biden administration actions against oil production and refining follow.
A U.S. refinery in Texas is planning to close no later than 2024, joining six others that have already shuttered in recent years. The Houston refinery is slated to close at the end of 2023 due to the financial burden of upgrading its infrastructure and advancing decarbonization goals pushed by the Biden administration. The U.S. refining industry lost about a million barrels a day of refining production capacity over the last two or three years and several other U.S. refineries are converting to biofuels where profits are much larger due to lucrative federal and state subsidies. In California, for example, refiners can receive as much as $3.70 per gallon in benefits by switching to biofuels.
In the recently signed climate/tax bill, the so-called Inflation Reduction Act, Senator Manchin tied new wind and solar leases on federal lands and waters contingent upon the sale of drilling rights in the same territory within a specific timeframe. The new law mandates three sales of offshore oil and gas leases –one this year in Alaska’s Cook Inlet and two next year in the Gulf of Mexico. The Interior Department is also required to reinstate a $192 million auction of Gulf drilling rights held last November that was voided by a federal judge. To issue onshore renewable rights over the next decade, an oil or gas lease sale will have to have been held in the previous four months or one year for offshore wind projects. The law also lays out minimum acreage requirements for offerings, although it does not stipulate offerings must be in areas that hold promise for hydrocarbons.
Biden’s Interior Department is developing strategies for implementing the leasing requirements that include options such as speeding up an auction of wind rights along the West Coast to make sure it occurs in the next three months and delaying the issuance of any purchased leases until new oil-leasing requirements are met. Some activists and lawmakers are encouraging the Interior Department to satisfy the mandate by only putting unwanted acreage on the auction block and packing leases with many onerous stipulations that even the most committed oil companies would not want to buy.
Refiners’ Work Around to Get Deliveries to the East Coast
Since March, at least eight vessels have transported gasoline components from the Gulf Coast to the Bahamas, and then delivered finished gasoline from there to ports along the Atlantic. Normally, Gulf Coast sellers make larger profits either by exporting petroleum products, or by sending gasoline or diesel to the East Coast by way of the Houston-to-New Jersey Colonial Pipeline, which carries about 2.5 million barrels per day of gasoline and other fuels. But, the Colonial pipeline is running at more than 98 percent capacity and the dwindling East Coast refineries do not have sufficient capacity to meet demand. Because the cost of space on the pipeline has increased, it is suddenly profitable to transport gasoline components via the Bahamas.
In 2021, the United States exported 146,000 barrels of gasoline components to the Bahamas. In May 2022 alone, that figure was 498,000 barrels—over 3 times more than the amount for the entire 2021 year. Last year, the United States imported 699,000 barrels of finished gasoline from the Bahamas–1.8 percent of all gasoline imports for the year. So far in 2022, the United States has imported 1.2 million barrels of gasoline from the Bahamas—almost double what was imported the entire 2021 year.
Conclusion
Energy Secretary Granholm is asking refiners to export less petroleum products because of worries that gasoline and diesel prices could spike before the November election if a hurricane should hit the Gulf Coast and wipe out refinery production. She has done nothing to increase oil production or refinery output. Rather, she, under orders from President Biden, has released oil from our emergency stores in an attempt to lower gasoline and diesel prices. That action of placing more oil on the market along with less driving by Americans and less oil demand globally has result in falling prices. However, they will not remain down because there are no real actions to increase domestic supplies of oil or refining capacity. Goldman Sachs anticipates that gasoline prices will be $5 a gallon by year end as the emergency releases conclude at the end of October, just before the election in November.
