Peak Refine
Once upon a time "Peak Oil" was our concern. Due to some incredibly daft decisions, "Peak Refine" is a much bigger concern!
When I started writing this stack, I didn't think I would be writing about energy so much... But my lord, are we in a bad way? Every time I ask a question and start trying to drill into the data to figure out the answer, I'm left dumbfounded! Our collective fascination with protecting the environment regardless of the cost is going to pose some really difficult problems for us in the future. Also, it’s not even clear that we are actually protecting the environment with these actions.
First let’s start with the concept of “Peak Oil.” Over the past 100 years there have been multiple discussions regarding when the earth’s supply of oil would run dry. Peak Oil was the point at which the earth will have reached the maximum amount of oil extractable. After this point we would be in a perpetual decline until we completely ran out of oil. As you may imagine, this has been a bit of a moving target as even as easier to extract oil does get depleted, harder to extract oil becomes more financially beneficial to extract and discover, thus the amount of extractable oil in the world continues to grow. It doesn’t appear that even currently we have reached “peak oil.”
In a moment we will discuss what I call Peak Refine, but first let’s discuss our current political environment. With ever-increasing gas prices over the past few months, the Biden administration has needed a scapegoat. At first the scapegoat was Putin, as the administration tried to place the blame for the gas increases on the Ukrainian invasion. While this did play a part in the increasing gas prices, the fact that gas prices had steadily been increasing during the last year and a half meant that this explanation didn’t completely pass the smell test. If Putin were solely to blame for the ever-increasing gas prices, why had they risen so much in the year preceding his invasion?
The administration next chose to pin blame on the oil companies. First, they said they were price gouging consumers. This explanation didn’t stand up to scrutiny as oil prices are set by the market, not the oil companies. So, they shifted and accused them of essentially dragging their feet on oil refining causing supply issues. They took the accusations well, if you ask me.
So, is it true that the oil companies are dragging their feet on refining? I’ll give you one guess.
Let’s look at data directly from the eia.gov website. EIA stands for the US Energy Information Administration, and they have a treasure trove of data to pore through that can help us better understand what our current energy status is.
First let’s focus on refining utilization. Refining is the process by which petroleum is distilled into a variety of products. These products range from gasoline to motor oil to diesel. Each of these products are distilled from a barrel of crude oil by heating the oil at a variety of temperatures that makes different components evaporate and separate from the base product. Utilization is the rate at which the facilities available for refining are being used.
The EIA breaks down the utilization by month and they have data going back many years. Utilization fluctuates seasonally based on demand, maintenance, and downtime to change to seasonal blends. If we compare the previous 12 months to historical averages we see that we are now above average utilization (after previously dropping below during the covid-19 response). In fact, current utilization, which isn’t reflected in this data yet is said to be above 95%!
But if we are running above average refinery utilization, then why are we seeing discussions of diesel outages this summer? So now we should look at refining capacity. Even if you are running at or above the previous refining utilization, if your total refining capacity is decreasing then you still end up with less finished product. For instance, if I had $100 and gave you 50% of my money, you’d have $50…. If I only had $90 and gave you 55% (more) of my money, you’d only have $49.50. I gave you a larger percentage of a smaller amount… and you got less. Same principle applies with oil.
As you can see, our refining capacity is steadily declining year over year. And it shows no signs of abating. Refinery capacity appears to be a significant bottleneck.
Our issues are manifold. As I discussed previously, Environmental, Social, and Governance Investment (ESG) is distorting standard business investments. In this case ESG investors are divesting from fossil fuel companies in lieu of green energy companies. How much are they divesting? In 2015 there were 59 global funds supporting oil and gas projects totaling $46.6 billion. In 2021 those numbers had dropped to 11 funds and $4.6 billion, respectively! From a financial perspective, this is incredibly dumb, but ESG investment is more concerned with “social” issues rather than making money. You may wanna take a closer look at your 401k. This loss of investment precludes fossil fuel companies from spending the resources necessary to build infrastructure such as oil drilling facilities, pipelines, and refineries. In fact, they are incentivized to transition existing refineries to support “renewable fuels.” This has resulted in the steady decline in refinery capacity in the United States over the past few decades.
In addition, the current administration is incredibly hostile to the fossil fuel industry. They have repeatedly discussed phasing out fossil fuels and preventing any new investments in fossil fuels.
If I am an oil company, what incentive do I have to attempt to invest in a new refinery? The project will inevitably be fought with multiple lawsuits to prevent its creation on environmental grounds. These lawsuits may even be joined by the US Government if it holds the same environmental views as the environmental activists that will spearhead such a campaign. And this is becoming increasingly obvious. When the democratic party propaganda network known as CNN is pointing out this reality to the Energy Secretary, you know you’ve got a problem.
Since 2019, eight refineries capable of refining 1.1 million barrels of oil per day have either closed completely or converted to renewable fuels. An additional 400,000 barrels per day capacity may come offline in the coming year, while only 300,000 barrels of daily capacity is currently proposed to be added. This isn’t sustainable. At least the administration isn’t actively blocking the addition of refinery capacity.
This brings us to the question, regardless of how much the administration begs, have we reached peak refine? I’m starting to fear that our refining capability has quite possibly reached a peak and will continue to decline in the coming years. The concerning part of this, is that this peak has been reached unnaturally. It is not a response to market forces, but rather to ESG investment strategies and political policies that have vilified the fossil fuel industry. And there is currently no viable backfill in place. The consequences for these actions are just now starting to be felt through the economy. And I see no reason to believe it will slow down any time soon. I’m sorry, but The Federal Reserve raising interest rates does nothing to solve the refining problem we are facing.