One might think that $120 a barrel oil would be incentive enough to start drilling and increase refinery capacity. Still, it appears energy producers are taking politicians at their word when they say they want to eliminate their industry. When the stated goal in Europe and the United States is to phase out fossil fuels over time, spending billions on refinery capacity is simply not in their best interest.

Take Europe as an example. The headlines say a lot about Russia and natural gas prices in a crisis state. Fracking bans throughout Europe in France, Germany, and the UK, amongst others, have not helped. Natural gas is a natural byproduct of pumping for oil, and with a short summer to prepare, Germany is already warning of shortages once the weather changes. They are so worried they are re-starting their coal-fired plants so they can direct all the gas flows into storage.      

We covered some of these dangers ahead in February in our article “War on Low Energy Prices.”  Listed below are just a few of the signals energy producers listen to, but the list could go on forever. 

Biden, in a debate – “No ability for the oil industry to drill. Period. Ends.”

Biden to a little girl – “I guarantee you. We are going to end fossil fuels.”

This helps explain why no new refineries have been built in the United States since 1977. Meridian Energy Group is attempting to build the first one. A short history of their permit process is below, which does not include the lawsuits fought thus far. Even Mexico is on year three of its newest refinery construction. The actual cost is already more than double the initial estimate of $8B. That project benefits from strong support from its President. 

  • Rezoning and Conditional Use Permits granted by Billings County in July 2016
  • Permit to Construct (Air) – From ND Department of Health – Permit Issued June 13, 2018
  • Water Appropriation Permit to State Engineer – Recommended Decision Approval on July 6, 2018– Final approval on February 1, 2019
  • Permit to Operate (Air) to be filed upon completion of Davis Refinery
  • Industrial Storm Water Discharge Permit – To be filed before operation
  • Permit to Construct (Air) – issued by ND Department of Environmental Quality in June 2018, upheld by ND Supreme Court – June 30, 2020

This leaves us with a few options. One, we continue to have extremely high energy prices, which impact virtually every good and many services. As Brent Belote from Cayler Capital points out, “When oil prices increase, you spend more money at the pump to fill your car, more money to heat your home, and more money to eat since most ag products have oil exposure.”  Two, excess capacity is found. This is the current goal as OPEC could help or countries such as Venezuela come to the rescue. China continues to build new refineries, one of the few places where this is happening and a source of potential capacity. They, however, show little interest in exporting, preferring to keep it for domestic needs. This is particularly true as they buy oil from Russia at a discount and keep large cities locked down with their zero COVID policy. Three, we enter a recession. Market reaction lately seems to be focusing on the third option as a distinct possibility. 

Traders on IASG such as Cayler Capital, Jaguar Aegir, and Amapa all depend on movement in these markets to identify opportunities. The disconnect between desired goals for low energy prices and ESG policies designed to increase them will continue for the foreseeable future unless one wins out. It won’t be through massive investment in new refining and drilling capacity until the producers believe they will not be targeted. Despite the current prices, signs point to even LESS refining as chemical maker Lyondell Basell announced the permanent closure of their Houston crude refinery just two months ago due to the cost of upgrading to new carbon standards. Instead, they will pay $700 million to take it down. This takes another 200,000 barrels a day from capacity we cannot afford to lose. 

Like many things in the investment world, we can complain about things or profit from them. So please reach out if you are interested in adding energy exposure to your portfolio. 


Penalties for not blending enough biofuels paid by refiners. 

Photo by Josh Redd on Unsplash