Gasoline prices at U.S. gas stations have risen to record highs even though crude oil prices are lower than previous highs, and the Biden administration’s plan to sell off reserves has not stopped rapid increases in domestic gasoline prices.
According to data released by the American Automobile Association (AAA), the average price of gasoline per gallon in the United States has soared from about $2.39 on January 20, 2021, to $4.81 on May 20, 2021.
In fact, the reduction in Russian oil supplies due to U.S. sanctions, while the demand for gasoline and diesel in major economies is still increasing, pushing the barrel equivalent prices of jet fuel, gasoline and diesel significantly higher than crude oil, refining margins (as shown by the 3-2-1 crack spread) has surged to all-time highs in recent weeks.
Pushing jet fuel, gasoline and diesel prices significantly higher than crude oil.
At this time, it stands to reason that American refiners and producers should have more motivation to increase production as the Biden administration wishes.
However, that still doesn’t help, as Chevron CEO Mike Wirth pointed out in a recent interview with the media, adding refining capacity is not easy, especially in the current environment.
Chevron CEO Mike Wirth.
Mike Wirth said:
“You’re looking at a 10-year capital investment and decades to deliver returns to shareholders, and the current policy environment is that governments around the world are saying: We don’t want these products.”
“In these policy discussions, we’ve had mixed signals.”
The Biden administration, while asking U.S. producers to increase production to help lower gasoline prices, has attacked U.S. refiners and producers for “going up oil prices” and considering punishing them with a “windfall profits tax.”
The reason why Buffett is heavy on oil stocks has been found
Wirth said that while international air travel has yet to return to pre-pandemic levels, “we are still seeing real strength in demand”.
“Demand in the oil industry is growing much faster than supply. We saw that in 2020, and it’s the same today.”
Wirth laments, in fact, “We haven’t built a refinery in the U.S. since the 1970s, and given the changes in policy around fossil fuels around the world, my personal view is that the U.S. will never build a new refinery. “
The Chevron CEO went on to explain:
“We’ve increased capacity by investing in existing refineries and debottlenecking existing refineries. But what we’ve seen in the last two years is shutdowns. We’ve seen refineries shut down and units reduced.”
“We’re seeing refineries being converted into biorefineries. We live in a world of policy, and the stated policy of the U.S. government is to reduce demand for the products that refineries produce.”
All the while, President Biden has been looking for “elusive” answers to why oil prices won’t fall at all.
Wirth is very candid about this:
“At every level of the system, our government’s policy is to reduce oil demand, so it’s very difficult for a business with a payback period of ten years or more. For a long time, the government’s stated policy has been Reduce demand for your product.”
In this way, Buffett has also found the reason for his heavy holding of oil stocks. Occidental Petroleum and Chevron are Buffett’s two major oil giants so far. The two companies have risen 126.3% and 48.92% respectively this year.
Wirth also said that the U.S. oil industry is actually ramping up production:
“We raised our Permian Basin production growth outlook to 15% this year. So what you’re hearing about the industry not increasing production is untrue. We are increasing production, our industry is increasing production.”
Finally, Wirth is reportedly expected to meet with the Biden administration in Washington next week.
Wirth said:
“We need to sit down and have a candid, pragmatic and balanced conversation about the relationship between energy and economic prosperity, national security and the environment.”
“We need to recognize that all of these are important.”