It really stresses me out to see this all laid out here, and then to see the Biden admin’s proposed solutions, and to note that they have approximately 0 overlap.
US petroleum refinery capacity has dropped partly due to bad luck (explosion in 2019 knocking Philadelphia Energy Solutions refinery off the market) and partly due to the generous incentives offered by California's Low Carbon Fuel Standard. Neste and Valero figured out early that they could make fat profits by pouring modest-cost feedstocks like UCO (used cooking oil) and beef tallow into refurbished petroleum refineries, and producing renewable diesel. So other petroleum refiners, notably Marathon, figured they could get into that game, especially in 2020, when the outlook for petroleum refining looked dismal. So the Martinez CA petroleum refinery went off line in 2020, and is coming back online in 2022 as a renewable diesel facility. There are other players doing the same thing, which has eaten into the US petroleum refining capacity. Of course, there's not enough beef tallow and UCO to go around, so these bio refineries will be looking for other feedstocks, like palm oil (sorry orangutans) and soybean oil (look out Amazon).
I don’t think there is anything we can realistically accomplish in the short term (chiefly 2022 midterms) to significantly increase the supply of gasoline and bring down the cost. As identified in the article, the chief bottleneck is refining capacity and that takes years to increase. We may be able to address this issue by 2024 to improve Democrats' election odds, but even that will require a major pivot on climate policy and messaging if we want an expansion of our domestic oil and gas industry.
And I think that would be a generally smart move politically and can be accomplished in a way that doesn’t harm our progress on the green transition. Yglesias explained this well in last week’s article, “The case against restricting domestic fossil fuel supply”. [1] Basically, fighting the domestic O&G industry is essentially a “shadow carbon tax”, with the “tax” captured by foreign O&G producers (e.g., Russia and Saudi Arabia). Further, rather than predictably increasing over time—as a carbon tax should so that consumers can plan to transition away—we instead get volatile prices that just financially harm Americans. That anti-domestic O&G industry policy and messaging could even be counterproductive if voters come to associate Democrats as the cause of the high and volatile energy prices.
Instead, we should focus on accelerating the green transition while having a healthy respect for a domestic O&G industry throughout the transition; a transition that will take over a decade. That would include messaging and policy that promotes our domestic O&G industry. For example, Yglesias has proposed decreasing the volatility of oil prices by massively expanding the strategic petroleum reserve to soak up domestic oil when it’s cheap (possibly guaranteeing a price floor for the domestic market) and sell it into the market when it gets expensive. [2] Such a shift in messaging and policy should generally encourage private investment in the domestic O&G industry as skittish investors get reassured that their investments will not be regulated out of existence in the near future.
Jun 20, 2022·edited Jun 20, 2022Liked by Noah Smith
"That will be a difficult mental whiplash for many, but desperate times call for flexibility and adaptation".
Sometimes I worry I am an elitist asshole with zero understanding of people, politicians and politics. Then I see a sentence like that and I feel better. Coz Noah seems to think it's hard to understand that long term =/= short term and that gasoline at $5+ with no practical alternatives for most people isn't doing the fight for climate change any favor.
On top of trying to boost oil production and oil refining capacity in the short term, I think we need to push hard to subsidize the rollout of solar/electric cars. They're medium-to-long term part of the climate change solution (even if we eventually have to geoengineer our climate, the less we need to temper with it, the better).
As an economist, what's your take on California Assembly Bill 2816? It didn't make it out of committee this year but might be part of future legislation.
2 further complications. Refineries are setup to take and use only certain types of oil - heavy, light, sulfur content etc. So no 1 to 1 correlation on increasing oil supply to increasing gas supply.
Also we export some portion of refined gas, diesel and jet fuel. What effect do the exports have on pricing.
So why are oil prices set internationally? Is this a creation of financial markets and trading companies? The ability to move oil from USA to EU is limited as is ability to move oil from Saudi to EU or USA. If tankers are maxed out why is there no large "ding" on pricing of oil as its "fungibility (??) becomes rather limited.
You forgot fly Air Force one to Tehran and act buddy buddy with everyone in exchange for a production increase, then when the Saudis complain ask why they haven't been pumping. We need to use the geopolitical tensions within OPEC to bust it.
How would the Republicans handle this problem and would it be any more effective than the Democrats? Republicans would institute a completely pro oil company policy and would be rewarded by the oil companies suddenly discovering they could reduce profits and cut prices without much actual change on the ground occurring. Your economic analysis ignores the fact that Big Oil can reward their friends and punish their enemies.
It really stresses me out to see this all laid out here, and then to see the Biden admin’s proposed solutions, and to note that they have approximately 0 overlap.
US petroleum refinery capacity has dropped partly due to bad luck (explosion in 2019 knocking Philadelphia Energy Solutions refinery off the market) and partly due to the generous incentives offered by California's Low Carbon Fuel Standard. Neste and Valero figured out early that they could make fat profits by pouring modest-cost feedstocks like UCO (used cooking oil) and beef tallow into refurbished petroleum refineries, and producing renewable diesel. So other petroleum refiners, notably Marathon, figured they could get into that game, especially in 2020, when the outlook for petroleum refining looked dismal. So the Martinez CA petroleum refinery went off line in 2020, and is coming back online in 2022 as a renewable diesel facility. There are other players doing the same thing, which has eaten into the US petroleum refining capacity. Of course, there's not enough beef tallow and UCO to go around, so these bio refineries will be looking for other feedstocks, like palm oil (sorry orangutans) and soybean oil (look out Amazon).
I don’t think there is anything we can realistically accomplish in the short term (chiefly 2022 midterms) to significantly increase the supply of gasoline and bring down the cost. As identified in the article, the chief bottleneck is refining capacity and that takes years to increase. We may be able to address this issue by 2024 to improve Democrats' election odds, but even that will require a major pivot on climate policy and messaging if we want an expansion of our domestic oil and gas industry.
And I think that would be a generally smart move politically and can be accomplished in a way that doesn’t harm our progress on the green transition. Yglesias explained this well in last week’s article, “The case against restricting domestic fossil fuel supply”. [1] Basically, fighting the domestic O&G industry is essentially a “shadow carbon tax”, with the “tax” captured by foreign O&G producers (e.g., Russia and Saudi Arabia). Further, rather than predictably increasing over time—as a carbon tax should so that consumers can plan to transition away—we instead get volatile prices that just financially harm Americans. That anti-domestic O&G industry policy and messaging could even be counterproductive if voters come to associate Democrats as the cause of the high and volatile energy prices.
Instead, we should focus on accelerating the green transition while having a healthy respect for a domestic O&G industry throughout the transition; a transition that will take over a decade. That would include messaging and policy that promotes our domestic O&G industry. For example, Yglesias has proposed decreasing the volatility of oil prices by massively expanding the strategic petroleum reserve to soak up domestic oil when it’s cheap (possibly guaranteeing a price floor for the domestic market) and sell it into the market when it gets expensive. [2] Such a shift in messaging and policy should generally encourage private investment in the domestic O&G industry as skittish investors get reassured that their investments will not be regulated out of existence in the near future.
[1] https://www.slowboring.com/p/the-case-against-restricting-domestic
[2] https://www.slowboring.com/p/america-needs-an-actual-plan-to-boost
"That will be a difficult mental whiplash for many, but desperate times call for flexibility and adaptation".
Sometimes I worry I am an elitist asshole with zero understanding of people, politicians and politics. Then I see a sentence like that and I feel better. Coz Noah seems to think it's hard to understand that long term =/= short term and that gasoline at $5+ with no practical alternatives for most people isn't doing the fight for climate change any favor.
On top of trying to boost oil production and oil refining capacity in the short term, I think we need to push hard to subsidize the rollout of solar/electric cars. They're medium-to-long term part of the climate change solution (even if we eventually have to geoengineer our climate, the less we need to temper with it, the better).
No one is investing in refurbishing or building new refineries because the industry needs to wind down. Democrats have put the writing on the wall.
https://www.washingtonpost.com/business/2022/06/20/refineries-profit-gas-prices/
As an economist, what's your take on California Assembly Bill 2816? It didn't make it out of committee this year but might be part of future legislation.
https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202120220AB2816
Thank you, I'd been looking for someone to post some of the charts (the final one, in particular)
2 further complications. Refineries are setup to take and use only certain types of oil - heavy, light, sulfur content etc. So no 1 to 1 correlation on increasing oil supply to increasing gas supply.
Also we export some portion of refined gas, diesel and jet fuel. What effect do the exports have on pricing.
So why are oil prices set internationally? Is this a creation of financial markets and trading companies? The ability to move oil from USA to EU is limited as is ability to move oil from Saudi to EU or USA. If tankers are maxed out why is there no large "ding" on pricing of oil as its "fungibility (??) becomes rather limited.
You forgot fly Air Force one to Tehran and act buddy buddy with everyone in exchange for a production increase, then when the Saudis complain ask why they haven't been pumping. We need to use the geopolitical tensions within OPEC to bust it.
Thanks Noah.
Is there an inflationary effect in the switch from oil to electric cars? Or is that not comparable.
How would the Republicans handle this problem and would it be any more effective than the Democrats? Republicans would institute a completely pro oil company policy and would be rewarded by the oil companies suddenly discovering they could reduce profits and cut prices without much actual change on the ground occurring. Your economic analysis ignores the fact that Big Oil can reward their friends and punish their enemies.