We Need a Medium-Term Plan for Our Energy Supply
Government intervention to get us through the in-between
Americans are feeling the squeeze of record-high gas prices. The average price of a gallon of gas in the United States is kissing $5.00, with little sign of significant easing on the horizon. And that’s in turn driving up inflation for all goods that are transported using fossil fuels.
This is partly a result of Russia’s invasion of Ukraine and the ensuing sanctions levied against Putin’s regime, which has shrunk the global supply of oil. But it’s also a story about the shifting ground here at home, and the collateral effects of the American fossil fuel era closing as a new green energy era comes into being. We’ll need creative government solutions to navigate us through the in-between period where the economy still runs on fossil fuels, but producers are moving toward the clean-energy future.
The Refining Bottleneck
In the shadow of the Russian oil supply crunch is a more fundamental course change in American energy production. The United States used to produce nearly 20 million barrels of refined oil per day — about the same amount as what the U.S. consumes. But since 2019, the U.S. has lost nearly a million barrels per day in oil refining capacity. That’s because a series of refineries have either closed or cut production in recent years — some shuttered during the early onset of the COVID pandemic; others have been damaged by natural disasters and are in need of costly repairs; and others are being repurposed to convert to renewable energy production.
These refinery closures mean that the U.S. cannot easily ramp up production to adjust for sudden supply shortfalls. The remaining refineries are operating at maximum capacity, with little room to boost production. And companies are hesitant to invest in new refining capacity because (a) the price of oil has crashed repeatedly in recent years, and (b) they see the writing on the wall: the U.S. is gradually leaving fossil fuels behind, and moving toward a clean-energy future.
Take electric vehicles. Only about 1 percent of the vehicles on the road in the U.S. today are electric, but forecasts project that by 2035, 45 percent of new car sales could be electric vehicles — meaning that a decade or so later, most cars on the road could be electric. And while EV supply is constrained right now — people can’t just ditch their gas-guzzlers en masse to go electric — the auto industry is moving quickly in that direction, with companies racing to roll out their own EVs.
Oil refiners are looking at that same prognosis. As the industry wrote to President Biden this month, “U.S. refining is a long-cycle business. Refiners do not make multi-billion-dollar investments based on short-term returns. They look at long-term supply and demand fundamentals and make investments as appropriate.” And long-term market and policy signals are all pointing toward scaling up clean energy production and dialing back fossil fuel production. That’s why half of the U.S. refinery shutdowns have been to convert to renewable fuel production. (Other refineries in Canada have followed the same path.)
So that’s the odd predicament we are in: We have a fossil fuel economy present — but a clean energy future. Because today’s economy still runs on fossil fuels, we need more oil production now to counteract supply shocks. But oil companies make investment decisions based on the future — and the future looks brighter for renewable energy than it does for fossil fuels. Meaning that the promise of a clean-energy future is choking off oil supply today.
That’s encouraging news for the environment. But it inflicts a lot of present-day pain on all those who need gas to fuel their cars to get to work and to heat their homes. And restricted domestic supply leaves us more vulnerable to exogenous supply shocks, whether from natural disasters or geopolitical unrest abroad.
Constrained oil supply is simply not socially viable in the near term. We need a managed transition to ensure we have adequate energy supply during the interregnum period in the waning days of the fossil fuel economy and the birth of a renewable energy economy.
Uncle Sam to the Rescue?
With the market failing to meet immediate and medium-term oil supply needs, there’s only one actor who can manage the energy transition: the U.S. government. That might mean direct government intervention to restart and maintain idled refining facilities.
Consider the planned closure of Houston’s LyondellBasell refinery, which produces 260,000 barrels of oil per day. As the Washington Post reports:
“There is a large refining facility in Houston up for sale right now. [. . .] The problem: Nobody wants to buy it. There has not been a single viable bid. In the absence of any offers, LyondellBasell plans to shut its 700-acre operation on the Gulf Coast no later than the end of next year. Quitting the refining business, the company said in a statement, ‘is the best strategic and financial path forward.’”
And rather than closing at the end of 2023, the Houston refinery could shutter even earlier after damage from a recent fire.
We could stand by and watch this refinery go offline and further diminish our domestic oil supply. But why not have the current owner sell it to the federal government? With no other bidders, the government could likely take over the facility for a steal— whether through direct ownership, direct investment, or some sort of conservatorship. Private-sector bidders aren’t interested in the refinery because they don’t expect it to be profitable over the next ten or twenty years. But long-term profitability doesn’t matter to the government— we’d just be enlisting the refinery in helping to prop up enough oil production to help get us through the energy transition.
The Houston facility isn’t the only contender for a government takeover. We wouldn’t want the government stepping on industry plans to pivot facilities toward renewables. But for facilities that are sitting idle or in need of repairs, the government could step in to take over ownership and operations. For example:
- The Alliance, Louisiana refinery (255,000 barrels per day) was shuttered in August 2021 ahead of Hurricane Ida and never reopened after incurring storm damage.
- Calcasieu Refining’s Lake Charles, Louisiana refinery (135,000 barrels per day) has been idle since the onset of the pandemic.
Admittedly, the optics of the government assuming responsibility for refining oil are uncomfortable — especially for an environmentally-friendly Democratic administration. But by taking direct control of a few domestic refineries, the government could manage our transition away from fossil fuels and wind down operations as more EVs hit the road and more clean energy gets deployed over the coming years. And the government could use revenue from its oil refining operation to hasten that transition by pouring it into a National Green Bank to support clean energy investment.
To secure our energy supply, the government may as well scoop up the discarded refining facilities unwanted by private industry. That would better enable us to shore up the oil supply we need to carry us through to our clean-energy future.
What About Now?
That’s all for the medium term. But Americans — and the Biden administration — are looking for solutions for today’s energy crisis. The Defense Production Act may be useful here. Exxon has already agreed to increase its refining capacity by 250,000 barrels per day. The DPA could be used to install additional capacity-enhancing infrastructure in other refineries, or even to restart some of the idle refineries.
Employ America’s plan to utilize the Strategic Petroleum Reserve and the Exchange-Rate Stabilization Fund to mitigate the risks of investment in new oil production is also worth considering. This would essentially have the government set a price floor under the future price of oil, while using government loan guarantees to unlock investment financing. But even this approach may not yield much pricing relief for nearly a year.
What won’t work are the plans floated by the administration to subsidize demand through gas tax holidays or gas card rebates. In a market with constrained supply, demand-side policies will backfire and encourage people to consume more gas.
A better demand-side strategy would be policies that reduce the demand for oil, rather than increase it. The Center for Public Enterprise has some ideas, the most politically palatable of which include: a public transit holiday with free fares for all; a WFH summer where employers are urged to let their staff work remotely to reduce commute-related gas consumption; and expediting public transit infrastructure construction.
Biden could also look at relaxing the Renewable Fuel Standard, which requires refiners to blend a mix of renewable biofuels like ethanol into their gasoline. This has minimal environmental benefits, but is quite lucrative for the agricultural industry — the conservationist Center for Biological Diversity has called the RFS a “colossal boondoggle.” The RFS has led to 40 percent of the country’s corn supply being diverted to produce ethanol, which in turn has increased U.S. food prices. Suspending or relaxing the RFS could be stem inflation in food prices — which have likewise soared since the invasion of Ukraine — and lower gas prices at the pump for consumers. And the cost of compliance with the RFS has also contributed to the closure of some U.S. oil refineries, including a trouble Philadelphia refinery that closed in 2019.
There’s debate over how much the RFS adds to gas prices, but some studies indicate it adds up to 30 cents per gallon. However, waiving the RFS could have the same counterproductive problems as slashing the federal gas tax by ultimately ginning up demand.
In truth, there are no magic short-term fixes readily available. And the least-bad strategy for quick relief at the pump probably involves Biden cajoling the Saudis or other unsavory petro-state regimes to release more oil on to the market. All of which should only reaffirm our vital national interest in leaving fossil fuels behind so we are liberated from dependence on foreign oil.
The squeeze we’re in today is a glimpse at what’s to come during the transition away from fossil fuels. Oil companies are already living in a green future, but we are still in a fossil-fuel-powered present. That’s a recipe for supply crises and price shocks — the birth pangs of a new clean-energy economy. We need smart supply-side policy to get us from here to there.