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ECONOMY

Wed 15 Mar 2023 9:27 pm - Jerusalem Time

Oil refineries cause rise in fuel prices in the United States

New York - (AFP) - Despite the rise in fuel prices to record levels in the United States, American oil refineries seem unable to keep up with demand, due to their lack of capacity after the closure of a number of these facilities in recent years, which contributes to the rise in fuel prices.


Last week, the rate of refinery utilization in the United States rose to 93.2 percent, the highest since December 2019, and constituted a breach in the month of May traditionally reserved for maintenance with limited facility utilization.


At the same time, US fuel reserves fell further to a level not recorded for this time of year in eight years, while this weekend in the United States on the occasion of Memorial Day (Memorial Day) marks the beginning of the main season for road travel.


"We are on our way to failure" of the system, warned Robert Yoger, an analyst at Mizuho Securities.


The consulting office, "Euriga Group", said that the "lack of ability to convert" oil into fuel, in addition to the rise in crude prices again, "led to a significant increase in refining prices (...) in recent months and to record prices for gasoline and diesel."


Fuel prices reached historic levels in the United States, rising more than 70 percent year-on-year. Analysts of the financial group "JP Morgan Chase" expect it to rise more than 30 percent during the summer, to more than six dollars a gallon (3.78 liters).


The number of operating refineries has decreased by 13 percent in ten years and is now the lowest in modern times.


In addition to the planned shutdowns, in June 2019 there was an explosion at the Philadelphia Refinery Solutions (PES) refinery in Philadelphia, the largest facility in the northeastern United States. This led to the permanent closure of the site.


It is an issue that is "a growing concern in the United States because we have lost more than 1 million barrels per day of capacity in one year," said Andy Lipow of the "Lippau Oil Associates" group.


In the early months of the pandemic, some sites closed to cope with slowing demand. But not all of them have since been restarted, like the Gallup (New Mexico) site owned by Marathon Petroleum.


Most of the major refineries have started converting some of their equipment to produce biofuels, which leads to a temporary suspension of their activities.


At Holyfront, the transition to renewable fuels has reduced the production capacity of its Cheyenne, Wyoming, facility from 52,000 barrels per day to 6,000.


These structural problems have been exacerbated by the war in Ukraine, which has pushed part of the West to dispense with Russia, a major supplier of refined products, especially diesel.


This situation led to an increase in the demand for hydrocarbon exports produced in the United States and to some extent increased the imbalance between supply and demand.
"Capacities can be rebuilt in the Northeast (...), but these are investments that have to be profitable over ten or twenty years," said Richard Sweeney, professor of environmental economics at Boston College. "The general trend is an industry in decline," he added.


Bill O'Grady of Confluence Investment Management agrees. He says that "it takes five or six years to build a refinery (...) knowing that the demand for products is probably declining." "Therefore, the investment incentive is very weak," he adds.


A large number of US refiners have chosen to allocate a large portion of their current profits to buy back shares and pay dividends rather than making huge investments.


The inauguration of the last major refinery in the United States dates back to 1977, while no more than five new sites have been opened during the past twenty years.
Bill O'Grady asserts that "what complicates the problem is that no town wants a refinery" on its territory. "It's dirty, it could explode and it smells bad," he added.


For his part, Phil Flynn of the "Price Features" group says, "Governments are trying to become more responsible in terms of the environment and deter investment in refining (...) but this leads to a shortage of capabilities."


He believes that "we will have to find a balance between our dreams about" environmental, social and governance standards "and the reality of trying to supply the market" with oil products until the supply of renewable energies becomes sufficient to replace them.

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Oil refineries cause rise in fuel prices in the United States

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