The price of oil and fuel products has skyrocketed ever since Russia’s invasion of Ukraine. Since then, Europe has been looking to quickly replace Russian diesel and gasoline by importing massive amounts of both from US refiners, who have in turn, benefited from the surging demand and resulting higher prices.
However, the US government is starting to get concerned about the amount of fuel being shipped overseas now that the quantity of diesel and gasoline in storage back at home is starting to decline. That can potentially cause shortages in the US over the next few months. Despite gasoline prices falling to a national average of $3.85 per gallon in the recent past from more than $5 in June, a sustained shortage could result in a price surge again.
According to a letter by the Secretary of Energy Jennifer Granholm sent to major US refiners earlier this month, the continued fuel exports are now starting to affect domestic supplies. Gasoline inventories are at their lowest level in nearly ten years on the East Coast, while diesel supplies are hovering at 50% below their five-year average.
Now that the peak of the hurricane season is in sight, Granholm is concerned that the shortages will likely become more severe. Hurricanes along the Gulf Coast have a long history of damaging refineries resulting in shutdowns for extended periods. To mitigate the effects of the impending shortages, the Secretary for Energy wants refineries to focus on catering to the domestic markets rather than exporting more fuel supplies overseas. In letters sent to the administration from some members of Congress, the legislators want exports abroad to be limited in order to safeguard US markets. Still, the White House has resisted those efforts so far.
A vague warning To Refiners
In the letter, the Energy Secretary warns that the government could ‘take action’ to compel the refiners to change their practices if the administration fails to see some changes. We hope that companies will be proactive when addressing this request, the letter states. Failure to do so will force the administration to consider other additional federal requirements or other emergency measures.
The Energy Department did not respond to a request for comment when asked about what specific actions it could take. Limiting US fuel exports could put the US in a tricky position since its exports have been so critical to Europe, especially as they try to come together to isolate Russia economically. So far, the administration hasn’t elicited any significant reaction from energy companies despite sending them critical letters regarding gasoline prices and other issues.
For energy investors, it’s essential to be aware that any shift in energy policies could have a much more significant impact on US refining companies like Valero (NYSE:VLO), Phillips 66 (NYSE:PSX), and Marathon Petroleum (NYSE:MPC). Phillips refused to comment on the letter, while the other Valero and Marathon didn’t respond to requests for comment. At the moment, it doesn’t appear like investors have been rattled by the possibility of federal action to limit fuel exports.
Even after The Wall Street Journal first highlighted the existence of the Department of Energy’s letter last week, refining stocks managed to avoid price declines. As a matter of fact, refiners resisted the downturn experienced by the broader market over the past couple of days. Valero, for instance, is up 3% over the last week and 12% over the last month. With the exceptionally high demand for the company’s products, it has the ability to earn such high margins that even government restrictions or the threats of a global economic slowdown can’t affect the stock.
Featured Image: Megapixl @Fotoslaz
