When Russia invaded Ukraine, oil sanctions caused crude prices to spike above $100 per barrel, forcing the Biden administration to push domestic producers to drill more. However, this was impossible, as the real bottleneck lay in refining capacity rather than oil in the ground. 

The U.S. had 301 usable refineries in 1982. Today, there are just 129, with the latest full-scale refinery having been opened in 1977

Adding new refineries is out of the question as building one would take not only a decade, but also cost billions of dollars few companies are willing to invest. With energy policy shifting to other sources as well, the existing network is all the industry has to work with.

While this effectively places the refining sector in a “sunsetting” phase, this doesn’t mean it’s going away anytime soon.

This puts investors focused on dividends and cash flows in a position to take advantage of a rare profit window.

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In June 2022, Chevron (CVX) CEO Mike Wirth sat down with then-U.S. Energy Secretary Jennifer Granholm to address spiking oil prices after Russia’s invasion of Ukraine.

With Russia supplying 13% of global oil before the war, sanctions sent crude soaring above $100 per barrel.

The Biden administration pushed domestic producers to drill more, but the real bottleneck was refining capacity rather than oil in the ground.

The U.S. had 301 usable refineries in 1982, today there are just 129. And the last new full-scale U.S. refinery opened in 1977.

Wirth explained that adding new refineries wasn’t realistic. The combination of environmental regulation, project costs, and shifting energy policy made it nearly impossible to break ground on a new site.

By the time Wirth met with Granholm, U.S. refiners were already running near full tilt. Unlike drilling rigs, which can be deployed and idled relatively quickly, refineries are massive, fixed assets that take years to plan and build.

Even if a greenfield project broke ground tomorrow, it would take about a decade and around $10 billion to bring online. After that, it would take another decade to earn back the investment. 

In a world where long-term oil demand is clouded by electrification and climate targets, few companies are willing to bet that kind of money.

That entrenched scarcity gives today’s refiners a built-in advantage. With no new entrants and steady demand for refined fuels, they can keep utilization high and margins healthy. 

Refining cracks, in other words, the profit spread between crude oil input and product output, stay elevated when capacity is tight.

This can result in cash-rich balance sheets for refiners who can funnel cash into shareholder returns, since they aren’t spending billions on expanding their capacity.

Special dividends, share buybacks, and steadily rising regular payouts have become standard in the sector.

Some operators are also using the windfall to modernize existing facilities, improving efficiency and reducing emissions without sacrificing output. This approach keeps regulators at bay while locking in cost advantages.

The combination of high utilization, wide margins, and restrained capital spending turns refiners into free-cash-flow machines. And in a capital-intensive industry, those conditions are rare.

Even though refining is a sunset business in the eyes of policymakers, this doesn’t mean it’s going away immediately.

The “sunset” phase can last decades in energy markets. 

Demand for gasoline, diesel, and jet fuel is still strong globally, and the infrastructure to replace it at scale doesn’t exist yet.

With replacement capacity decades away, the owners of existing refineries are in an advantageous position. They’re running assets with high barriers to entry, strong pricing power, and minimal competition for new supply.

Investors often chase growth stories, but sometimes the best returns come from scarcity and predictability. In refining, the scarcity is in the ability to turn crude into usable products. 

With construction of new plants effectively off the table, today’s refiners hold a strategic choke point in the energy value chain. 

As long as demand remains steady, their margins and free cash flow will keep fueling shareholder payouts. Investors looking for steady dividends and buybacks should take a look at today’s refiners.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research