Brian Mudd

Brian Mudd

There are two sides to stories and one side to facts. That's Brian's mantra and what drives him to get beyond the headlines with daily stories driven...Read More

 

Q&A of the Day – What You’re Actually Paying For With Five Dollar Gas 


Today’s entry: Hi Brian, I heard today that US refineries are at 95% capacity. So, all the discussion about untapped oil leases and bad oil companies would seem to be mute. Now, if the refineries are really at 95%, there would seem to be no hope to increase supply. What is the real story? 

Bottom Line: Well, the real story is that what you’ve heard is generally right. US refiners aren’t maxed out, but there’s very little capacity left in the system for faster refining. Today’s note came on the heels of last week’s Q&A where I dispelled President Biden’s myth that the problem with high gas prices, and inflation generally, is part Putin and part US energy companies. In his note to US energy companies, he specifically called out refining operations as a significant part of the inflation puzzle – noting margin expansion within the refining industry. There’s only one problem with all of this. It’s not based in reality – at least when the end-to-end analysis within the industry is considered. As I mentioned... 

The average profit margin of energy companies over the past year has been 8.3% - which happens to be the 2nd lowest of any US industry. The average profit margin has been 10.6%, or 28% higher than the energy industry. What’s more...profit margins are falling. Current profit margins are pacing 8.1% for this year, a 2.4% decline over last year’s margins. Biden’s claims are outrageous in that he created the issues through executive actions and demonstrably false when facts are presented.   

So, what’s happened is that even as refining margins have risen of late, they’ve been more than offset by declining margins in other aspects of the energy supply chain. That’s easy to do because refining costs are by far the lowest of any which play into what we pay for with a gallon of gas. I’ll come back around the dynamics involved in refining space, including what’s been happening to many refiners over the past year but first, here’s a synopsis of what goes into what we pay for a gallon of gas: 

  • 53% - oil  
  • 21% - taxes 
  • 18% - transportation and retail margin 
  • 8% - refining 

Here’s the breakout in what we’re really paying for when we buy a gallon of gas – using $5, which was the recent national average and what we hit last week in South Florida as well, as a round number to work with. 

  • $2.65 - oil 
  • $1.05 - taxes 
  • 90 cents – transportation costs & retail margin 
  • 40 cents – refining cost 

This breakout shows what a farce it generally is to be targeting refining costs as the issue for expensive gas. But then again when you’ve already tried a failed tactic of blaming “Putin’s Price Hike”, I’d expect nothing less from the administration. The cost of refining is by far the lowest cost element of what we pay for a gallon of gas and if it were free, it’d still only make $5 gas about $4.60 per gallon. And obviously the price of oil itself, and secondarily taxes, are immovable objects. What is important though is the impact government policy has on all aspects of the process – including refining. Here’s a recap of ExxonMobil’s response to Biden’s effort to blame them for our energy cost woes: In the short term, the U.S. government could enact measures often used in emergencies following hurricanes or other supply disruptions -- such as waivers of Jones Act provisions and some fuel specifications to increase supplies. Longer term, government can promote investment through clear and consistent policy that supports U.S. resource development, such as regular and predictable lease sales, as well as streamlined regulatory approval and support for infrastructure such as pipelines. 

On that note, and specific to refining here’s where we stand in the United States. According to the American Fuel & Petrochemical Manufactures as of June 6th the US was using 93% of its current refining capacity. So, the 95% figure you heard is roughly correct. According to the AFPM, the US has lost the refining capacity of 1.1 million barrels of oil per day since the onset of the Biden administration. And why is capacity so limited currently?: A combination of factors is responsible for the United States’ loss of refining capacity. Choices to convert or shutter refineries are made very carefully—factoring in present and projected future fuel demand, the political environment as well as facility locations and their individual market access. Political and financial pressure to move away from petroleum derived fuels, costs associated with federal and state regulatory compliance and facilities’ singular economic performance all inform these decisions. 

Sounds similar to the undertones of Exxon’s response to Biden doesn’t it? As I’ve illustrated many times, it was day one Biden administration policy to kill the Keystone XL pipeline, but also week one policy to sign sweeping executive actions to increase regulations on energy companies and to ban the harvesting of energy on 2.46 billion acres of federal land. When you hear increased regulations, it’s opaque, but the bottom line is the Biden administration targeted refiners for increased regulations causing many of the refineries which were underutilized during the pandemic to be shuttered or converted for other purposes. That’s why we’re in the current spot we’re in. But even then it’s still a matter of wagging the dog.  

We’ve not hit full capacity and there aren’t gas shortages. While there’s limited room for increased refining capacity – we have what we need for now. The bigger problem is the need to increase oil production for the purpose of driving down the cost of a barrel of oil which is the majority cost of what we pay for with a gallon of gas. Biden’s full of attempted distractions and refining is one of them. 92% of what we’re paying for at the pump has to do with stuff not related to refining. In slightly better news, oil prices are off about $10 a barrel over a week ago, so there will be a near-term tailwind for slightly lower prices at the pump. So, there’s that, even if it’s perhaps due to lessening demand because of a pending recession.  

Each day I feature a listener question sent by one of these methods.  

Email: brianmudd@iheartmedia.com  

Gettr, Parler & Twitter: @brianmuddradio  

iHeartRadio: Use the Talkback feature – the microphone button on our station’s page in the iHeart app. 

Fuel price high, Gas or Gasoline increased or rising cost concept.

Photo: Getty Images


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