The Oil Industry Warns More Trouble Is Coming

Andy Snyder|June 23, 2022

Expect more trouble.

In fact, expect trouble for the next five years.

That’s the latest word from the oil industry… an industry that’s gotten itself into a bit of a fight with the White House.

We’ve said it many, many times: Money goes where money is treated best.

With its subsidies for electric vehicles (EVs), its ethanol mandates and its oh-so-burdensome regulations, Washington has hardly paved a smooth runway for the oil industry.

Money has all but abandoned the sector.

The list of refineries that have shut down in just the past two years is quite long…

LyondellBasell is closing its huge, 260,000-plus-barrel-per-day facility in Houston, Texas.

A storm shut down the Phillips 66 operation in Belle Chasse, Louisiana. At half a century old, the plant is too old to restart. The company says it’d be too expensive.

Shell says its nearby plant will close too. Same story. It tried to sell it… but no buyer wants it.

Too expensive.

In California and New Mexico, Marathon Petroleum closed two plants due to falling demand and rising costs.

In Rodeo, California, Phillips 66 is turning its crude refiner into a renewable fuels plant. It says that’s what the market – and its carbon-crazed regulators – wants.

It’s the same story in Cheyenne, Wyoming. HollyFrontier once ran a profitable refinery there. Now the company has closed it and is converting it into a renewable diesel plant.

In all, some 3 million barrels per day have come offline over the last two years.

It’s costing you money.

Again, that’s what the folks in charge want.

It means more demand for all those electric cars.

The problem is… the White House got fooled.

It took a victory lap and raised its “Mission Accomplished” banner, thinking reduced refinery demand was a product of increased EV usage.

But that wasn’t the case… at all.

EVs make up a mere 5% of all vehicle sales. A full 95% of cars and trucks still burn gas or diesel.

Once the COVID-19 slowdown eroded, the naked truth came out.

We’re in a bad spot.

Bad Math

Anyone who’s followed the nation’s energy industry knows the problem isn’t with finding new oil. America’s awash in the stuff. And getting it out of the ground is cheaper than ever.

The problem is what to do with it after it comes out of the ground.

There hasn’t been a new refinery of any significance built in the United States since 1977. Some units have been added onto, but a new plant has not been erected.

Why not?

It’s simply too expensive.

It used to be that we’d expect building a new refinery to cost $10,000 per barrel of oil it could process in a day. But that number doubled over time to $20,000… and now stands north of $25,000.

That puts the cost of a new refinery at about $6.5 billion.

Even with today’s fat profit margins, that makes the payback period well over a decade – assuming the industry is still around in a decade.

In fact, Exxon recently explored building a new refinery in Guyana. The price tag would have been at least $5 billion. It figured that would guarantee a loss of about half its initial capital.

“The numbers are so negative it becomes very, very difficult,” said the advisor in charge of the project.

The deal won’t happen.

Instead, the advisors told the government not to pursue refining its crude. They said to instead do what so much of the world does… get really good at getting the stuff out of the ground cheaply and then simply export it to the countries with refining capabilities.

That’s where money is treated best.

Making Money

The opportunity for investors in all of this lies in the battle between the government and the free market.

If freer forces were in charge, refineries would surely be built. The arbitrage opportunities are clear.

But nobody wants to put a few billion bucks on the line to get hit with an immediate windfall tax and then get slammed as the government forces crude off the market over the next 10 years.

Dare we say it, but it’s another instance of getting what you vote for.

Money goes where it’s treated best.

If the people want green energy… clearly they’re going to have to pay for it.

The next few years are going to be very expensive.

It’s good news for the few remaining refineries and the pipelines that feed them.

They’ve got what 95% of cars need… and nobody is making more of it.

Note: Proving that Washington never learns its lesson… it just announced preliminary plans to reduce the amount of nicotine in cigarettes by 95%. It says it will lead to a dramatic reduction in addiction. But the history books beg to differ. The market will go haywire. It forces us to ask… What’s next, alcohol-free whiskey and saltless potato chips?