Bottlenecks at oil refineries have sent US gas prices soaring to top $5 a gallon — and the crisis is unlikely to end soon

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Bottlenecks at oil refineries have sent US gas prices soaring to top $5 a gallon — and the crisis is unlikely to end soon
Bottlenecks at oil refineries have sent gas prices surging.Al Seib/Getty Images
  • Gas prices have surged to record highs, hurting US drivers and causing a nightmare for Joe Biden.
  • Rocketing oil prices are at the root of the problem, but unprecedented bottlenecks at oil refineries are making it worse.
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US gas prices have surged to record highs of $5 a gallon, hitting American drivers hard and creating a political nightmare for President Joe Biden.

A more than 50% jump in crude oil prices this year — largely due to Russia's invasion of Ukraine — lies behind the run-up in fuel costs.

But that's not the whole story.

Analysts say gas prices are much higher than they ordinarily would be, when compared with the price of crude.

That's because of what Goldman Sachs has called "unprecedented" bottlenecks at oil refineries, where crude oil is converted into usable products like gas.

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The sprawling plants are still reeling from the impact of the coronavirus pandemic, and they can't cope with the rebound in demand for gasoline, diesel and jet fuel. That has pushed up their prices.

Unfortunately for drivers, analysts say refineries will struggle to ramp up production quickly and to alleviate the pressure.

Coronavirus has battered the industry

At the heart of the crisis is the fallout from the pandemic. As COVID rocked the world economy, energy consumption plunged, and many refineries shuttered operations.

Analysts at Wood Mackenzie, an energy consultancy, estimate that 3 million barrels a day of refinery capacity shut down in 2020 and 2021.

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And once you shutter a refinery, it can be hard to get it running again.

"You introduce a lot of operational issues that come back to haunt you a few months later," Claudio Galimberti, a senior analyst at energy consultancy Rystad, told Insider. "Running a refinery is very complicated."

In Europe, the price of natural gas — a key refining ingredient — surged as economies rebounded from COVID last year. That meant many plants lowered their output, which depleted inventories.

Elsewhere, China's pledge to slash greenhouse-gas emissions has seen Beijing severely restrict the export of refined products. The move has slashed flows to Europe, and they're unlikely to ever bounce back fully.

On top of all this, Russia's exports of refined products have dropped, largely as a result of "self-sanctioning" by Western companies.

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Refiners will struggle to ramp up production

The huge increase in the price of gasoline and other refined products is spurring the refinery industry into life, potentially boosting supply and easing some of the pain at the pump.

Analysts say further price rises of the sort already seen are unlikely. But drivers shouldn't expect a sharp fall soon.

"This is going to be a tight market for certainly the next two years," Mark Williams, a research director at Wood Mackenzie, told Insider. "We'll be maintaining this high price environment certainly through to the middle of next year."

It takes time to build new refineries. And even though profit margins are high right now, many investors are wary of sinking money into polluting industries.

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Williams said the complexity of refining means sometimes projects simply don't work out, so it's hard to predict how much supply will increase in the coming years.

Demand for oil is holding up

The other side of the equation is demand for oil. It jumped towards the end of 2021 as economies around the world lifted coronavirus lockdowns.

But will sky-high gas prices — they topped $5 a gallon this week — make drivers cancel their journeys?

Analysts at Wood Mackenzie said there's been little sign of so-called demand destruction so far. What's more, the US peak summer driving season is only just getting going.

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A whole host of other issues dog the market. The EU has agreed to ban the bulk of Russian oil exports, refined products included.

Meanwhile, analysts are struggling to predict how much oil China will need this year, due to its strict zero-COVID policy. If the economy reopens fully, crude oil prices could rise sharply again. Uncertainty is the only certainty.

Read more: Goldman Sachs' star economist lays out whether the US is heading for a recession and reveals what could trigger a rebound in the floundering stock market following the crash

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