(Oil & Gas 360) By Greg Barnett, MBA – In April 2020, as COVID-19 shut down economies, grounded airplanes and emptied highways, I participated in a conference call with energy analytics company. One slide from that presentation has remained in my files for more than six years.
Its title was simple: “Long term damage being done to high cost non-OPEC supplies.”
The slide showed estimated production-weighted lifting costs—the cash cost of producing oil from an existing field—at approximately $2.80 per barrel in Saudi Arabia, $3.10 in Russia, $6-$7 in the Middle East, $9 in Norway, $15 in the United States and $32 in Canada. Its estimated averages were $9 per barrel for OPEC and $15 for non-OPEC producers.
Those were not full-cycle costs. They did not represent what companies needed to find, develop, replace and earn an acceptable return on the next barrel of oil. That distinction mattered.
Oil producers could continue producing existing barrels while simultaneously stopping the capital investment required to produce future barrels. Refineries faced a related problem. Demand collapsed, refinery utilization plunged, margins deteriorated and companies began making decisions about facilities that required enormous amounts of capital simply to remain competitive.
At the time, the world appeared to have too much petroleum.
Six years later, the President of the United States is considering using the Defense Production Act to expand American oil-refining capacity.
How did we get from there to here?
The answer involves COVID, economics, environmental and regulatory policy, capital allocation, refinery conversions, geopolitics, wars, Russia, the Middle East and something economists occasionally underestimate: once a large industrial asset disappears, a price signal cannot simply turn it back on.
America Did Not Simply “Lose” Refining Capacity
First, some numbers.
The United States entered this century with approximately 16.6 million barrels per day of operable atmospheric crude-oil distillation capacity. EIA currently reports approximately 18.16 million barrels per calendar day of operable capacity. America therefore has more aggregate refining capacity today than it did when George W. Bush entered the White House.
That fact needs to be stated because another fact is simultaneously true.
A review of EIA refinery shutdown data indicates that approximately 2.6 million barrels per day of individual U.S. refinery capacity has been shuttered since 2001. Meanwhile, surviving refineries have been expanded, debottlenecked and made substantially more productive.
In other words, America did not simply shrink its refining system. America concentrated it.
We closed numerous facilities while investing heavily in the survivors. The result is fewer physical refineries, larger individual plants and less geographic redundancy in portions of the country. EIA’s 2026 data show 128 operating refineries and two idle facilities. That distinction matters when something goes wrong.
A barrel of Gulf Coast refining capacity is not necessarily a substitute for a barrel of lost West Coast refining capacity. Pipelines, ports, product specifications, transportation costs and refinery configurations matter.
EIA itself made that point in a 2024 analysis. After the Philadelphia Energy Solutions refinery closed in 2019, East Coast gasoline became increasingly dependent on pipelines from the Gulf Coast and Midwest and on imports from Canada and Europe. EIA found that the East Coast retail gasoline premium over the Gulf Coast subsequently widened. On the West Coast, geographic isolation, limited pipeline connectivity and specialized California gasoline requirements make replacing lost local production particularly difficult.
National capacity statistics can therefore hide regional vulnerability.
Then Came 2020
COVID provided an extraordinary stress test.
U.S. refining capacity fell 4.5% in a single year, to approximately 18.1 million barrels per day at the beginning of 2021. Six refineries closed during 2020. EIA attributed the closures to several causes, including collapsing petroleum demand, poor refinery economics and plans that in some cases predated the pandemic. Some facilities subsequently converted to renewable-fuel production.
This is where discussions of refinery closures can become too political too quickly. Not every refinery closed because of government policy. Some were old. Some were uneconomic. Some suffered accidents. COVID destroyed demand. Some companies preferred investing their capital elsewhere. Some refineries were converted to renewable diesel. Environmental compliance requirements and changing federal and state policies also influenced capital decisions.
Regardless of the explanation, capital allocation decisions ultimately depend on expected risk-adjusted returns. Capital asks a simpler question: What return am I likely to earn if I put another billion dollars here? If the expected return is inadequate relative to the risk, the money flows somewhere else. Like the Mississippi River, capital rarely stands still.
Closing a Refinery Is Different From Temporarily Shutting One Down
The distinction has suddenly become important because of Russia.
Ukrainian drone attacks have damaged Russian refining infrastructure repeatedly during 2026. As of September 15, three of Russia’s six largest diesel-producing refineries had either substantially reduced production or stopped. Those six refineries normally account for approximately half of Russian diesel production. Russia has responded to domestic shortages by restricting exports of diesel and other fuels. Before those restrictions, Russian diesel and gasoil exports averaged approximately 3.3 million to 3.4 million metric tons per month.
On September 16, Reuters reported that Rosneft’s Syzran and Saratov refineries had ceased operations following additional drone attacks. Syzran’s primary crude-distillation unit, representing approximately 71% of the plant’s capacity, was reportedly heavily damaged, with repairs expected to require at least a month.
Russia has a serious refining problem. But Russia’s problem is fundamentally different from part of America’s problem. Russia has refining equipment that has been damaged. America has refining equipment that in many cases has been permanently retired, dismantled, redeveloped or converted to another purpose. If the attacks stop and equipment can be repaired, Russian refining capacity can return. A refinery that no longer exists cannot respond to a $100 diesel crack spread. That is the difference between a temporary outage and the permanent destruction of productive optionality.
The Price Signal Is Screaming
Markets are remarkably good at telling us when something is scarce.
On September 16, Asian refining margins for 10-parts-per-million sulfur diesel exceeded $87 per barrel, according to LSEG data reported by Reuters. Before the current Middle East war, those margins were around $22 per barrel. Asian refiners are responding exactly as economics would predict: increasing crude runs, producing additional diesel and sending available barrels farther into global markets.
That is the market saying: REFINE. REFINE. REFINE.
But refining is not like turning up the thermostat.
A refinery already operating near its practical limit cannot magically process another 100,000 barrels tomorrow. Nor can a gasoline-oriented configuration instantaneously maximize diesel production. Refineries contain crude-distillation units, cokers, catalytic crackers, hydrocrackers, reformers, hydrotreaters and other equipment whose configurations determine what products can economically be manufactured from particular crude oils.
That is why “spare global refining capacity” deserves considerably more scrutiny than the phrase usually receives. Nameplate capacity is not necessarily usable capacity. And usable crude-processing capacity is not necessarily spare diesel-producing capacity.
What Does Lost Capacity Cost Consumers?
This is where we should resist making claims that the data cannot support.
Crude oil remains the largest underlying feedstock cost for gasoline and diesel. If crude rises $20 per barrel, additional refinery capacity does not make that crude-cost increase disappear.
Refining capacity affects another portion of the equation: the margin required to turn crude oil into usable petroleum products and, critically, the scarcity premium that develops when product supply cannot respond sufficiently to demand.
EIA provides a useful real-world modeling benchmark.
In 2024, EIA examined what would happen if refinery constraints reduced U.S. gasoline production. Its high-refining-cost scenario produced about 2% less gasoline during the summer driving season, contributing approximately $0.04 per gallon to wholesale gasoline prices.
When EIA incorporated regional supply constraints and higher refining costs, its modeled U.S. average retail gasoline price increased approximately $0.10 cents per gallon. On the more isolated West Coast, the modeled increase approached $0.20 cents per gallon. Those numbers tell us something important. Additional refining capacity does not necessarily reduce gasoline prices by $0.50 cents every day.
Its value becomes disproportionately greater when the system is stressed.
An extra 500,000 or 1 million barrels per day of economically viable refining capacity provides something beyond additional average production. It provides optionality, which in energy markets is simply another word for resilience. Spare capacity earns little attention when markets are balanced, but during hurricanes, wars, outages, or supply disruptions it can become one of the most valuable assets in the system.
That optionality is particularly valuable for diesel.
Diesel Is Not Just Another Fuel
Consumers see gasoline prices on signs every day. They frequently do not see diesel prices embedded in almost everything else they purchase.
Diesel moves Class 8 trucks. It powers agricultural equipment, combines, tractors, construction equipment, mining machinery, locomotives, marine equipment and backup generators. When gasoline gets expensive, consumers can reduce discretionary driving. A farmer halfway through harvest cannot tell the combine that diesel prices are inconvenient. A trucking company cannot instantaneously replace hundreds of diesel tractors with battery-powered Class 8 trucks. Construction companies cannot park excavators and wait for a different national energy system to materialize.
Much of short-term diesel demand is consequently difficult to destroy without simultaneously reducing economic activity. When diesel becomes scarce, businesses frequently do not stop buying it. They pay more. And eventually their customers pay more. That makes diesel prices an inflation issue extending far beyond the truck stop.
Washington Discovers Refining Capacity
Now comes the remarkable part.
On April 20, 2026, President Donald Trump issued a presidential determination under Section 303 of the Defense Production Act of 1950 covering domestic petroleum production, refining, processing, storage and logistics.
The determination concluded that domestic industrial resources were inadequate to meet national-defense requirements sufficiently quickly without presidential action and authorized DPA mechanisms intended to expand those capabilities.
By September, the White House was examining how that authority could be used specifically to expand U.S. refining capacity.
Reuters reported that refinery executives discussing the issue with the administration favored improving efficiency, debottlenecking and expanding existing facilities rather than relying primarily on construction of entirely new refineries. The reason is obvious: expanding an existing complex can be substantially faster and less expensive than permitting, financing and constructing a greenfield refinery. U.S. refinery utilization was already near 98% when those discussions were taking place.
Consider the irony of the sequence.
America spent decades allowing individual refining facilities to disappear while concentrating production in increasingly large and efficient plants. Now, with utilization approaching practical limits, Washington is considering the use of national-defense authorities to encourage additional refining capacity. Now the remaining system is operating near its limits while the federal government considers invoking national-defense authority to encourage companies to create additional capacity. That does not mean every refinery closure was a mistake. It does mean we should calculate the economic value of what disappeared before deciding that it did not matter.
And Now, Stop Diesel Exports?
Against this backdrop, Senate Majority Leader John Thune has said he is open to considering restrictions on U.S. diesel exports as domestic prices surge.
There is a legitimate question behind the proposal: if American consumers face extremely high diesel prices while U.S. refiners export diesel, would keeping more gallons at home temporarily increase domestic supply? Perhaps.
But there is a second question investors should ask.
If Washington wants companies to commit billions of dollars to increasing American refining capacity, what happens to the expected return on that investment if Washington simultaneously reserves the right to restrict where refiners may sell their output?
One policy attempts to increase the supply of diesel. The other attempts to control the destination of existing supply. Those are not the same economic proposition.
And Russia is conducting its own version of the export-restriction experiment right now. Moscow is reportedly preparing to extend diesel export restrictions through the end of October as it tries to protect domestic supplies following refinery disruptions.
Export restrictions can redistribute scarcity. They cannot manufacture another gallon of diesel.
The World Is Discovering the Difference Between Oil and Refined Products
For years, much of the energy-security discussion centered on crude oil. How many barrels does Saudi Arabia produce? How much can OPEC add? How much oil is in the Strategic Petroleum Reserve? How much crude can the Permian Basin produce?
Those remain important questions.
But consumers do not put crude oil into pickup trucks, combines, airplanes or eighteen-wheelers. They consume refined petroleum products.
The current global market is demonstrating why that distinction matters. Middle East disruptions have affected crude and product flows. Russian refinery attacks have reduced product availability. Russian export restrictions have removed additional internationally traded barrels. Asian diesel margins have reached records as refiners race to capture the economics created by scarcity.
Meanwhile, America possesses enormous crude-oil resources and one of the world’s most sophisticated refining systems. What it does not possess is unlimited spare refining capacity.
That is not something an executive order can manufacture overnight.
The Lesson From April 2020
Which brings me back to that Energy Aspects slide from April 2020.
The immediate crisis was collapsing demand and collapsing oil prices.
But the slide’s title was about something else: “Long term damage.”
That is the nature of capital-intensive industries. The effect of today’s capital decision may not become visible for years. Cancel a drilling program today and production might not decline immediately. Close a refinery today and consumers might not notice if other refineries have excess capacity. Stop building pipelines today and existing pipelines continue operating. Discourage investment today and nothing necessarily breaks tomorrow. Then demand grows. A refinery has an outage. A war begins. A pipeline gets attacked. A shipping route closes. Diesel inventories tighten.
And suddenly the market discovers that redundancy was not wasted capital. It was insurance.
The United States should examine every refinery closure since 2001 and ask what caused it. Economics? Age? Accident? COVID? Conversion? Environmental requirements? Regulatory uncertainty? Corporate capital allocation? Some combination?
Facts first.
Then we should ask what it would cost to replace the productive capacity that is permanently gone—and how many years replacement would require.
Because Russia’s damaged refineries may eventually be repaired. Ours cannot simply be switched back on.
America knows how to produce oil. America knows how to refine oil. American companies know how to allocate capital and engineers know how to increase throughput when investment earns an acceptable return. The market is currently offering one of the strongest economic signals imaginable that additional refining capability has value. Perhaps the instruction does not need to be complicated:
REFINE. REFINE. REFINE.
By oilandgas360.com contributor Greg Barnett, MBA.
The views expressed in this article are solely those of the author and do not necessarily reflect the opinions of Oil & Gas 360. Please consult with a professional before making any decisions based on the information provided here. Please conduct your own research before making any investment decisions.
