From Closing Refineries to Invoking the Defense Production Act: America’s Shift in Refining Capacity

**How Did America Go From Closing Refineries to Invoking the Defense Production Act?**

*By Greg Barnett, MBA*

In April 2020, as the COVID-19 pandemic paralyzed global economies, grounded flights, and emptied roads, I attended a conference call with an energy analytics firm. One slide from that presentation has remained in my files ever since.

Its title was simple: *“Long term damage being done to high cost non-OPEC supplies.”*

The slide detailed estimated production-weighted lifting costs—the cash cost to extract oil from an existing field. The figures were telling: 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. The average lifting cost was $9 per barrel for OPEC and $15 for non-OPEC producers.

These were not full-cycle costs; they did not reflect what companies needed to spend to discover, develop, and replace a barrel of oil while earning an acceptable return. That distinction proved critical.

Faced with collapsing demand, oil producers could keep existing wells flowing while halting the capital investments required for future production. Refineries faced a similar dilemma. As demand cratered, utilization rates plunged and margins deteriorated, forcing companies to make tough choices about facilities requiring massive capital investments just to stay competitive. At the time, the world seemed awash in excess petroleum.

Six years later, the President of the United States is considering using the Defense Production Act (DPA) to expand American oil-refining capacity.

How did we transition from a massive surplus to considering national-defense emergency measures?

The answer lies in a complex mix of COVID-19, economics, regulatory and environmental policies, capital allocation, refinery conversions, and geopolitics. It also highlights a reality that economists sometimes overlook: once a massive industrial asset is dismantled, market price signals cannot simply turn it back on.

### America’s Concentrated Refining Landscape

To understand where we are, we must look at the data.

The United States began the 21st century with roughly 16.6 million barrels per day (b/d) of operable atmospheric crude-oil distillation capacity. Today, the Energy Information Administration (EIA) reports approximately 18.16 million b/d of operable capacity. On paper, America has more total refining capacity now than it did in 2001.

However, that statistic hides a parallel reality.

EIA refinery shutdown data shows that approximately 2.6 million b/d of individual U.S. refinery capacity has been permanently shuttered since 2001. The remaining refineries survived by expanding, debottlenecking, and becoming highly efficient.

In short, America did not simply shrink its refining sector—it concentrated it.

We closed numerous smaller facilities while investing heavily in the largest, most efficient plants. This leaves the nation with fewer physical refineries, larger individual complexes, and less geographic redundancy. EIA data shows just 128 operating refineries and two idle facilities. When disruptions occur, this lack of geographic diversity becomes a major vulnerability.

A barrel of refining capacity on the Gulf Coast cannot easily substitute for a lost barrel on the West Coast. Pipelines, shipping ports, regional product specifications, transportation costs, and specific refinery configurations all dictate market dynamics.

The EIA highlighted this in a past analysis. Following the 2019 closure of the Philadelphia Energy Solutions refinery, the East Coast became increasingly reliant on pipelines from the Gulf Coast and Midwest, as well as imports from Canada and Europe. Consequently, the retail gasoline price premium on the East Coast compared to the Gulf Coast widened. On the West Coast, geographic isolation, minimal pipeline connectivity, and unique California fuel specifications make replacing lost local refining capacity exceptionally difficult.

National capacity figures often obscure these regional vulnerabilities.

### The Catalyst of 2020

The pandemic served as a severe stress test for the industry.

U.S. refining capacity dropped by 4.5% in a single year, falling to roughly 18.1 million b/d by the start of 2021. Six refineries closed in 2020 alone. The EIA attributed these shutdowns to a combination of collapsing demand, poor margins, and pre-existing corporate plans. Some of these facilities were subsequently converted to produce renewable fuels.

While refinery closures are often highly politicized, the reality is nuanced. Not every closure was driven by government policy. Some plants were aging, some were unprofitable, and others suffered catastrophic accidents. COVID-19 decimated demand, and some companies chose to allocate capital elsewhere, including renewable diesel conversions. Environmental compliance costs and shifting regulatory policies also played a role.

Ultimately, capital allocation comes down to risk-adjusted returns. Investors ask a simple question: *What return will I earn on the next billion dollars invested here?* If the projected return is insufficient relative to the risk, capital flows elsewhere.

### Temporary Outages vs. Permanent Losses

This distinction has become highly relevant due to recent geopolitical events.

Ukrainian drone strikes have repeatedly damaged Russian refining infrastructure. In late 2026, three of Russia’s six largest diesel-producing refineries—which normally account for half of the country’s diesel output—were forced to shut down or sharply reduce production. Russia responded by restricting exports of diesel and other fuels to protect its domestic market. Prior to these curbs, Russian diesel and gasoil exports averaged over 3 million metric tons per month.

Reports indicated severe damage to primary distillation units at key facilities like Rosneft’s Syzran refinery, requiring extensive repairs.

While Russia faces a severe refining crisis, its challenge is fundamentally different from America’s. Russia’s capacity is temporarily damaged; America’s lost capacity is largely gone for good—either dismantled, redeveloped, or permanently converted to other uses. Once Russian infrastructure is repaired, its capacity can return. A demolished American refinery, however, cannot react to high diesel margins. This is the difference between a temporary disruption and the permanent destruction of industrial optionality.

### Strong Market Signals

When a commodity is scarce, the market sends clear signals.

Recently, Asian refining margins for ultra-low-sulfur diesel surged past $87 per barrel—up from around $22 per barrel prior to the escalation of conflict in the Middle East. Asian refiners responded exactly as economic theory dictates: they maximized crude processing, boosted diesel yields, and exported products to global markets.

The market is loudly signaling: *Refine more fuel.*

However, boosting refining output is not as simple as turning up a thermostat. A refinery operating at peak capacity cannot suddenly process more crude. Furthermore, a plant configured to maximize gasoline cannot instantly pivot to maximize diesel. Refineries rely on highly complex, integrated units—such as hydrocrackers, cokers, and catalytic crackers—that dictate what products can be economically made from specific crude slates.

This is why “global spare refining capacity” is often misunderstood. Nameplate capacity does not equal usable capacity, and crude-processing limits do not always reflect diesel-producing capabilities.

### The Cost of Lost Capacity

While crude oil remains the primary driver of gasoline and diesel prices, refining capacity dictates the margins required to process that crude and the price spikes that occur when supply cannot keep pace with demand.

An EIA modeling exercise demonstrated this dynamic. Analyzing a scenario where refining constraints reduced U.S. gasoline production by just 2% during the summer driving season, the EIA found it added about $0.04 per gallon to wholesale prices.

However, when incorporating regional supply bottlenecks and higher localized refining costs, the average retail price rose by $0.10 per gallon nationally, and by nearly $0.20 per gallon on the West Coast.

These numbers show that while extra refining capacity may not lower everyday prices by $0.50 per gallon, its true value lies in system resilience. Having an extra 500,000 to 1 million b/d of viable refining capacity provides a buffer during hurricanes, military conflicts, or unexpected outages.

### The Critical Role of Diesel

While consumers focus on gasoline prices at the pump, diesel prices are quietly baked into the cost of almost every consumer good.

Diesel powers freight trucks, agricultural machinery, locomotives, marine vessels, and construction equipment. While drivers can cut back on road trips when gasoline prices rise, a farmer cannot halt a harvest because diesel is expensive. Trucking and construction companies cannot easily swap their heavy machinery for electric alternatives overnight.

Because short-term diesel demand is highly inelastic, businesses must pay the higher prices and pass those costs onto consumers. This makes diesel a major driver of broader economic inflation.

### Emergency Federal Intervention

In a surprising turn of events, federal policymakers have begun focusing heavily on refining capacity.

President Donald Trump issued a presidential determination under Section 303 of the Defense Production Act of 1950, targeting domestic petroleum production, refining, processing, and logistics. The administration concluded that domestic industrial capabilities were insufficient to meet national defense needs without federal intervention, authorizing DPA mechanisms to expand capacity.

When discussing how to implement this authority, refinery executives urged the administration to focus on debottlenecking, improving efficiency, and expanding existing facilities rather than building new greenfield refineries. Expanding existing plants is faster, cheaper, and easier to permit, especially with U.S. refinery utilization rates already hovering near 98%.