Refinery outages amid lower capacity increase U.S. gasoline crack spreads

Unplanned refinery outages and lower gasoline production capacity are increasing the costs of producing summer-grade gasoline in the United States this summer, resulting in both higher U.S. crack spreads and retail gasoline prices. The crack spread, the difference between petroleum product prices and crude oil prices, is an indicator of underlying trends in refining, and it usually makes up about 25% of the retail gasoline price. This summer, U.S. gasoline crack spreads had remained less than those of last summer, up until the final weeks of July and into August (Figure 1). Although U.S. gasoline consumption has increased from last summer and inventories remain near five-year lows, recent developments in U.S. refining activity are primarily driving crack spreads this summer.

Both retail gasoline prices and crack spreads are higher in the summer than in other seasons because of higher consumption and because of higher production costs for summer-grade gasoline than for winter-grade gasoline. Motor gasoline is a combination of different components—such as reformate, alkylate, and aromatics—that can be produced from different petroleum refining processes. Until they are blended with ethanol for retail consumption, we refer to these components collectively as motor gasoline blending components.

Different proportions of each component are used to meet varying product specifications by season and region, including formulations to reduce pollutants (such as sulfur and benzene) as well as specifications related to the fuel’s volatility (rate of evaporation) and octane rating. The octane rating measures the fuel’s resistance to igniting under pressure; a higher rating indicates greater ignition resistance. Gasoline with insufficient octane can cause engine knock. The production costs for motor gasoline with higher octane vary by season because of limitations on which petroleum blendstocks refiners can use. Winter-grade gasoline can use more volatile blending components to meet octane specifications (such as butane), which are less expensive than high-octane components with lower volatility, such as reformate or alkylate.

The widening price spread in the spot market between high-octane gasoline blendstock (used to produce premium-grade gasoline) and low-octane gasoline blendstock (used to produce regular-grade gasoline) reflects the higher costs associated with producing high-octane gasoline. At the New York Harbor and the U.S. Gulf Coast trading hubs, the spot price difference for high-octane gasoline blendstock compared with low-octane gasoline blendstock has widened compared with previous summers (Figure 2). These spot prices are for unfinished gasoline (gasoline blendstock after production from a refinery but before it is blended with fuel ethanol and can be sold to customers). Fuel ethanol increases motor gasoline’s octane rating, but ethanol is also limited by its volatility and an automobile’s engine specifications, so it comprises no more than about 10% of most finished motor gasoline.

Several unplanned refinery outages have prevented refiners from producing enough high-octane blendstock to meet summer demand. Many of the outages have occurred at secondary conversion units, including fluid catalytic cracker (FCC) units, reforming units, and alkylation units. Some notable outages in recent months include:

• In June, Phillips 66’s Bayway New Jersey refinery reported an outage to its FCC unit, the largest FCC in the East Coast (PADD 1), which lasted until late July.
• In late July, ExxonMobil reported an outage at one of its two FCC units at its Baton Rouge, Louisiana refinery, which lasted through August 6.
• The catalytic reformer unit at Marathon’s Galveston Bay refinery —the second-largest reformer in the Gulf Coast (PADD 3)—has been shut since mid-May and will remain shut through the third quarter.
• Valero’s Memphis refinery restarted several units in late July after those units lost power. It may restart its alkylation unit in late August, which has been shut since August 3.

The secondary-unit outages mean the refinery needs to reduce crude oil and unfinished oil inputs, which we survey in our Weekly Petroleum Status Report. On a year-over-year basis, there were less refinery gross inputs in the East Coast and Gulf Coast this June and July compared with the same months in 2022, even though they were higher than corresponding 2022 gross inputs heading into the summer months (Figure 3 and Figure 4). As of mid-August, however, both East Coast and Gulf Coast gross inputs returned to 2022 levels.

Aside from unplanned refinery outages, structural changes in U.S. refining since the COVID-19 pandemic have also increased the production costs for summer-grade gasoline that meets specifications for octane, volatility, and emissions. The largest factor in the higher production costs is the reduced refinery capacity and secondary conversion unit capacity. Secondary conversion units are necessary to produce fuels that meet summer-grade gasoline specifications. FCC capacity was 9% lower on January 1, 2023, than it had been on January 1, 2020, reformer capacity was 5% lower, and alkylate production capacity was 4% lower. Our Refinery Capacity Report includes capacity as of January 1 of each year, so we have not yet reported any of capacity additions in 2023. In addition, standards to reduce sulfur in gasoline that tightened in 2020 may also be increasing demand for certain blending components. Reducing the sulfur content of gasoline is primarily done through increased hydrotreating, which can reduce octane and might require gasoline blends with a higher percentage of more expensive blendstocks, such as reformate and alkylate. This summer’s unplanned outages have amplified the effects from these structural changes in U.S. refining.

In 2018, EIA contracted with the refining consultant Baker & O’Brien to study the growing price difference between regular-grade retail gasoline and premium retail gasoline to determine if the refining costs of producing high-octane gasoline was the cause of the increasing difference. Baker & O’Brien concluded that the increasing price spread was not a result of refining costs, but instead, it was likely the result of consumer choice among retail customers. Although we have not commissioned another study, reduced capacity and unplanned refinery outages suggest that limitations surrounding production of summer-grade gasoline this year are driving production costs higher, increasing crack spreads.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.