Global Refining Crunch Threatens to Keep US Gas Prices High This Fall

U.S. gasoline prices are poised to remain elevated through the fall, even as the peak summer driving season concludes, due to a severe global shortage in refining capacity triggered by geopolitical conflicts. This supply bottleneck has created a fundamental disconnect between the price of crude oil and the cost of finished fuels at the pump.

According to data from the American Automobile Association (AAA), the national average for gasoline currently stands at approximately $4.06 per gallon. While this is down from the year's high of $4.56, it remains 36% above the price on February 27, before a major conflict erupted in the Middle East, the source noted.

Geopolitical Crises Squeeze Supply

Energy executives report that conflicts have taken a significant volume of global refining capability offline. Valero Energy (VLO) COO Gary Simmons stated on a recent earnings call that the war in Ukraine and the Middle East conflict have shuttered about 5 million barrels per day of refining capacity. Similarly, ExxonMobil (XOM) CEO Darren Woods noted Friday that available capacity is at a "historic low," citing 3 million barrels per day offline in the Middle East due to shipping disruptions in the Strait of Hormuz and another 1 million barrels per day from Ukrainian drone attacks on Russian facilities.

"The refining market fundamentals are very tight and getting tighter because of the issues in Russia and the Middle East," said Brian Mandel, an executive vice president at Phillips 66 (PSX). Marathon Petroleum (MPC) CEO Maryann Manning added that the restart of Middle Eastern refineries has been "very, very slow," warning that any further disruptions could tighten supply even more.

Disconnect Between Crude and Pump Prices

This constraint on refining is altering market dynamics, creating a situation where fuel prices are driven more by processing capacity than by the cost of crude oil itself. "In the past, the market had ample refining capacity, so gasoline prices were primarily determined by crude oil costs," Woods explained. "Today, the bottleneck in refining has created a 'disconnect between the price of crude and the price at the pump.'"

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This dynamic helps explain why fuel prices have remained stubbornly high even as crude oil has fallen from its recent peaks. Patrick De Haan, head of petroleum analysis at GasBuddy, warned that if a stable agreement on passage through the Strait of Hormuz isn't reached, U.S. drivers could face record-high prices for Labor Day, potentially surpassing the 2012 record of $3.83 per gallon.

Record Profits for US Refiners

With global supply tight and demand robust, U.S. refiners are operating at full tilt and reaping historic profits. The margin between their cost to purchase crude oil and the price they sell finished products for, known as the crack spread, exceeded $70 per barrel in late July—nearly the price of a barrel of U.S. crude at the time.

This has led to a windfall for the industry, with several companies reporting record or near-record earnings:

• Valero Energy (VLO) posted its strongest quarter ever by earnings per share, with net income soaring over fourfold year-over-year to $3.7 billion.
• Marathon Petroleum (MPC) and Phillips 66 (PSX) saw second-quarter profits jump more than 300% to $5.1 billion and $3.8 billion, respectively.
• HF Sinclair (DINO) reported a nearly fourfold increase in net income to $892 million.

To capitalize on these high margins, some refiners are delaying planned maintenance, according to De Haan. However, executives caution that bringing damaged international facilities back online will be a "long process," dependent on assessing damage and sourcing spare parts, suggesting the supply crunch may persist.