U.S. Weighs Emergency Refining Expansion as Diesel Supply Tightens

WASHINGTON — The White House is considering how to use the Korean War-era Defense Production Act (DPA) of 1950 to encourage U.S. refiners to increase output as a global diesel squeeze, intensified by Ukrainian drone strikes on Russian refineries, pushes up fuel costs and fuels debate over export restrictions.

A presidential determination issued under Section 303 of the DPA found that domestic industrial resources for petroleum production, refining, processing, and storage are inadequate to meet national defense requirements. Section 303 permits the federal government to offer financial incentives, including loans or purchase commitments, to expand domestic industrial capacity.

Refinery executives involved in discussions with the administration have urged federal officials to prioritize efficiency upgrades, debottlenecking, and expansions at existing plants. U.S. refinery utilization is already near its practical limit of 98%, and industry leaders say enlarging existing complexes is faster and less expensive than financing new “greenfield” projects, which face stringent regulatory hurdles, high capital costs, and lengthy permitting timelines.

The debate also extends to the diesel trade. Senate Majority Leader John Thune (R-S.D.) recently said he was open to considering temporary restrictions on U.S. diesel exports to protect domestic consumers from surging prices. Energy economists and industry advocates warn that such restrictions could disrupt the capital markets required for refinery expansions.

Capital allocation in the refining sector depends heavily on risk-adjusted global returns. Critics say companies could withhold the multi-billion-dollar investments needed to expand domestic capacity if Washington retains the authority to restrict where refiners may sell their products.

Asian refining margins for 10-parts-per-million (ppm) sulfur diesel rose above $87 per barrel in mid-September. Before the escalation of conflict in the Middle East, the average had been $22 per barrel.

The surge has been driven heavily by disruptions in Russia, where Ukrainian drone strikes have repeatedly hit critical energy infrastructure. By mid-September, three of Russia’s six largest diesel-producing refineries had either stopped operating or sharply reduced throughput. Together, those facilities account for approximately half of the nation’s diesel output.

On September 16, Russian state-controlled energy giant Rosneft suspended operations at its Syzran and Saratov refineries after drone attacks. The strike on Syzran severely damaged its primary crude distillation unit, which represents about 71% of the plant’s capacity; repairs are expected to take at least a month. Moscow has restricted exports of diesel and other fuels through at least the end of October to protect its domestic market. Before the restrictions, Russian diesel and gasoil exports averaged between 3.3 million and 3.4 million metric tons per month.

The global squeeze comes after decades of change in the U.S. refining system. Operable atmospheric crude-oil distillation capacity has increased from 16.6 million barrels per calendar day (bpd) in 2001 to approximately 18.16 million bpd today, leaving the country with more aggregate refining capacity than it had at the start of the century.

At the same time, the Energy Information Administration (EIA) says the United States has closed approximately 2.6 million bpd of individual refining capacity since 2001. Production has shifted into fewer, larger, and more efficient plants rather than remaining distributed across a broad network of smaller facilities. The EIA’s latest data list 128 operating refineries and two idle facilities nationwide.

That consolidation accelerated during the COVID-19 pandemic. Lockdowns caused global travel and fuel demand to collapse in 2020, briefly sending West Texas Intermediate (WTI) crude futures into negative territory. U.S. refining capacity fell 4.5% that year, while six refineries closed permanently because of poor operating economics, age, or planned conversions to renewable diesel production.

The resulting geographic concentration has made domestic fuel supplies vulnerable to regional disruptions. Refineries in different parts of the country cannot easily substitute for one another because of pipeline constraints, product specifications, and maritime shipping regulations.

After the 335,000-bpd Philadelphia Energy Solutions refinery, the largest refinery on the East Coast, permanently shut following a massive explosion in 2019, the region became heavily reliant on fuel pipelines from the Gulf Coast and imports from Canada and Europe. Regional retail price premiums permanently widened.

An EIA impact study modeled the effect of these constraints. It found that a 2% reduction in summer gasoline production caused by refining limitations would add $0.04 per gallon to wholesale prices, produce a $0.10 per gallon national retail increase, and raise prices by as much as $0.20 per gallon on the isolated West Coast.

Diesel carries especially high economic stakes because it is the logistical backbone of the U.S. economy. Class 8 freight trucks, agricultural combines, locomotives, and heavy construction equipment all depend on it. Passenger gasoline consumption can be voluntarily reduced during price spikes, but short-term diesel demand is highly inelastic; shortages therefore raise operating costs across supply chains and contribute to broader consumer inflation.

Refinery configuration further limits how quickly plants can respond. Abundant crude oil alone is not enough to produce specific fuels such as diesel, which require specialized equipment including hydrocrackers and hydrotreaters.

Global production economics add another layer of risk. Historical industry estimates place the cash “lifting costs” of producing an existing barrel of oil at $2.80 in Saudi Arabia and $3.10 in Russia, compared with $15 in the United States and $32 in Canada. These differing cost structures leave non-OPEC producers facing higher capital risks, making the preservation and expansion of domestic refining capacity critical for long-term supply resilience.