America's Refining Capacity Crisis: From Too Much Oil to Potential Shortage

At the start of the COVID-19 pandemic, energy analysts were warning about the long-term damage being done to non-OPEC oil supplies due to high production costs. In April 2020, a conference call with an energy analytics company showed estimated production-weighted lifting costs for various countries, with the US at $32 per barrel and Canada at $15. The slide also noted that these were not full-cycle costs, but rather cash costs of producing existing oil fields.

Fast forward to 2026, where the President is considering using the Defense Production Act to expand American oil-refining capacity. This raises questions about how the US went from having too much petroleum to a potential refining shortage. The answer lies in the concentration of refining capacity over the years.

The US has not simply lost refining capacity; rather, it has concentrated its remaining refineries by investing heavily in survivors and closing numerous facilities. Today, there are 128 operating refineries and two idle facilities, with approximately 18.16 million barrels per day of operable capacity. However, this concentration can mask regional vulnerability, as the East Coast is increasingly dependent on pipelines from the Gulf Coast and Midwest due to the closure of the Philadelphia Energy Solutions refinery.

COVID-19 provided an extraordinary stress test for US refining capacity, which fell 4.5% in a single year due to collapsing demand, poor economics, and planned closures. Some refineries converted to renewable-fuel production, while others were shuttered altogether. The distinction between temporarily shutting down a refinery and permanently closing it is crucial, as the latter cannot be easily revived even with increased demand.

Currently, Russian refining infrastructure is under attack from Ukrainian drones, resulting in damaged equipment and reduced production. This has sparked a response to restrict diesel exports, which could exacerbate global shortages. The price signal for refining is screaming, but it's not as simple as just turning up the thermostat, refineries need time to adjust their configurations and increase production.