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The Euro, the U.S. Economy, and Energy

Refined Oil Products Will Stay Higher for Longer

Crude oil is trading above $120 a barrel, with gasoline and diesel prices breaking records across the U.S. and no relief in sight. Refineries struggled to restart after pandemic-related initial shutdowns, so the surge in demand as the pandemic eased caught the market well short of normal refined product inventory levels. As demand increased, prices doubled from last January’s levels.  Similar price surges in the past brought on new supply, a classic supply/demand equilibrium. This time around, there hasn’t been as much new investment into exploration or refining capacity. Available oil inventories are sitting at their lowest point in five years, and refineries continue to operate at maximum capacity.

The U.S. hasn’t built a new petroleum refinery since the 1970s. Existing refineries are either running at absolute capacity or are down for maintenance, meaning there is no slack in this critical part of the energy supply chain. The second chart below emphasizes the rise in the crack spread – the profit for each barrel of oil refined, which should be an incentive for more capacity to be built.  Recently the CEO of Chevron commented on the lack of capacity, offering his opinion that there would never be another refinery built in the U.S. despite the probability of future shortages.
  
It seems pretty clear that the price of gasoline and diesel are going to stay high for some time, with unanticipated spillover effects into the broader economy. At least part of the surging inflation reported across a broad mix of products can be directly attributed to the much higher cost of fuel.