The Embarrassing Truth About Making Things

(Almost) nothing runs on crude oil... A million barrels a day gone... The global metabolism... 'The Chicago Way'... Squeamish about messy jobs... The world is leaving us behind...

Crude oil is nearly worthless...

Sure, global benchmark Brent crude hit $100 per barrel this week. But good luck doing anything with it yourself.

As it comes out of the ground, crude oil is a hodgepodge of thousands of hydrocarbon molecules all mashed together. It's also filled with a bunch of stuff you don't want in your gas tank, like sulfur, nitrogen, iron, copper, nickel, and vanadium.

To turn this mess into something useful, you need an oil refinery.

Oil refining separates raw crude into various types of useful products and cleans up all the waste. The resulting products have to meet technical and regulatory specifications before anybody can buy them.

A refinery puts out 15 or 20 major bulk products. Many of them probably will sound familiar, from lightest to heaviest: propane, butane, gasoline, jet fuel (kerosene), diesel fuel, heating oil, lubricants, paraffin wax, grease, asphalt, and elemental sulfur.

That's just scratching the surface. Refineries can produce hundreds of substances that go into thousands upon thousands of products. Wherever you go in the modern world, from farms and factories to suburbs and cities, you're surrounded by products that started out as crude oil.

So crude oil has little value on its own. But once it's refined, it's essential to our modern standard of living.

Yes, a crude-oil engine will run on almost anything, including raw crude, engine waste, and even vegetable oil. Some marine engines can also run on crude, but the oil needs filtering first. But these are edge cases.

You don't buy crude oil at the gas station, nor do you pay a crude-oil bill every month to heat your home or cook your food. You buy gasoline or diesel, or natural gas or propane: products that can't exist without a refinery.

And that's mostly what refineries make. On average, according to the U.S. Energy Information Administration, a 42-gallon barrel of crude oil at an American refinery will produce:

• 19 to 20 gallons of gasoline

• 11 to 13 gallons of distillate fuel (mostly diesel)

• 3 to 5 gallons of jet fuel

It's probably impossible to find some aspect of modern life that doesn't depend on the modern modes of transportation represented by those three fuels.

Unfortunately, America isn't gaining refinery capacity. We're losing it. Since the pandemic, more than 1 million barrels per day of refinery capacity has shut down. A little of that has been made up by expanding the facilities that survive, but we still need a lot more.

Like the food we humans eat, crude oil was provided by Mother Nature...

You can't get the protein out of a steak by rubbing it on your arm. You have to eat it.

In other words, just like with crude oil, we need to send our food through a refinery – our bodies – to extract its value to us. Your body's metabolic system takes what you feed it (the "crude"), then mechanically and chemically breaks it down into amino acids, fatty acids, sugars, vitamins, and minerals – each routed to where it's needed.

Oil refineries then are the metabolic systems of what I'll call the global body economic (I'll leave the "body politic" for the TV pundits). Refineries take in raw feedstock, break it apart into useful products, and get rid of the waste, just like our bodies do.

And just like our body's metabolic processes, we can't live without them... at least not in the comfortable, modern manner to which we've become accustomed.

Unfortunately, oil refineries aren't found in nature. They're highly complex, highly engineered facilities that must be built by human beings. That's more of a problem than ever, because no one can build a new oil refinery in the U.S.

I spelled out all the reasons in the April 24 issue of The Ferris Report. The quick summary: American environmental regulations make it impractical to even begin construction of a new refinery. And given political animosity toward fossil fuels, companies are unwilling to even try making big long-term investments in refinery capacity here.

(An aside: A company called America First Refining claims it'll build a refinery in Brownsville, Texas. "America First" is essentially the same company's sixth corporate identity in 10 years. It has been failing to build pipelines and storage at the same site since 2016. I'll be shocked if it manages to build a refinery – a much larger, more expensive, and more complicated project.)

So we need refineries – from legitimate, proven companies – but they're not coming. You can guess what that means for the prices of refined products... and you'd be right. You can see it on a chart showing percent changes in crude oil and the 3-2-1 Gulf Coast WTI crack spread.

The 3-2-1 spread represents the profit refineries make from producing two barrels of gasoline and one barrel of diesel fuel from every three barrels of West Texas Intermediate ("WTI") crude oil, the U.S. benchmark. The chart shows oil generally higher but mostly sideways since the initial rise through mid-March, while refinery margins are in a serious bull market.

The point of the chart is simple: the performance of the crack spread is crushing the daylights out of the oil price since the Iran war began. The spread is up more than 246%, while crude is up just 66%. WTI crude is back up around $90 a barrel today. The crack spread hit $65 per barrel on July 17 – its all-time high. And it's only slightly off that high today. Take a look...

I expect the crack spread to remain high as long as the war continues...

And it doesn't look like the war is about to wind down.

As my colleague Nick Koziol shared on Wednesday, President Donald Trump recently declared that he'd destroy one bridge or power plant for every shot the Iranians took at ships in the Strait of Hormuz.

That same day, the president ordered the U.S. Central Command to "open the gates of hell" against Iran.

Trump instantly reminded me of Sean Connery in the 1987 film The Untouchables. Connery played Jimmy Malone, a hardboiled Chicago cop who was explaining how federal agents could beat Al Capone:

They pull a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue. That's the Chicago way.

The Chicago Way will destroy more Middle Eastern refineries, liquefied natural gas trains, and other energy infrastructure. It'll also restrict tanker access through the Strait of Hormuz and the Bab el-Mandeb Strait (from the Red Sea to the Indian Ocean).

The U.S. government will spend billions of dollars, possibly even a trillion or more, to wage war. Americans dying in a foreign hellhole is OK with them.

But building new energy infrastructure in America? Not a chance.

The debt will keep rising, the bombs will keep dropping, and politicians will remain head-over-heels in love with excessive, highly stringent environmental laws. You want cheaper gas at the pump, America? Sorry, best we can do is bombing a major energy-producing region to smithereens.

The core issue is more basic than politics, and it's embarrassing...

We're too squeamish.

Our lives run on things we don't want to make in our own backyard because it might get a little messy.

I understand, really. I do. I've driven through places like Elizabeth, New Jersey, where you can see Phillips 66's Bayway refinery as you drive down I-95. Nobody looks at it and thinks, "Boy, I wish I had one of those next door."

Still, America has gone too far to avoid the perceived danger of adding a new oil refinery, chemical plant, metal refinery, or other critical infrastructure.

We sent these dangerous, dirty processes overseas. We seem to have completely forgotten how much we depend on fossil fuels, cement, steel, plastics, ammonia, metals, rare earths, chemicals like sulfuric acid and sodium cyanide... and many other substances we've largely outsourced to other countries.

Simply put, we're more scared of pollution than we are of China controlling our standard of living...

Oil refineries provide the perfect example. Last year, independent refinery giant Valero Energy shut down its 170,000-barrel-per-day Benicia refinery in the San Francisco Bay Area. As I told Ferris Report readers last December:

The company attributed the decision to "years of regulatory pressure, significant fines for air quality violations, and a recent lawsuit settlement related to environmental concern."

I've noted before the irony that the city of Benicia has become a hub for receiving imported fuel from China, rather than refining its own. California is so economically suicidal, it would rather depend on China for gasoline and diesel fuel than make the stuff itself.

The rest of the U.S. isn't much better off than California. A recent report from the American Council for Capital Formation presented an ultimatum:

Without policy recalibration, the United States risks ceding supply resilience and geopolitical influence to foreign competitors.

The report noted that U.S. refineries are mostly set up for heavier grades of crude oil, while the U.S. mostly produces light, sweet crude. That makes us more dependent on foreign sources. And competing countries aren't making the same mistake. From the report...

As U.S. capacity contracts, foreign competitors are rapidly expanding. China has built a state-directed refining system rivaling U.S. scale, tightly integrated with petrochemicals and manufacturing supply chains. India has emerged as a major refining exporter by exploiting sanctions-driven discounts on Russian crude, gaining structural cost advantages over U.S. facilities. Across the Middle East, Africa, and Latin America, state backed refinery projects are reshaping global fuel flows and displacing traditional U.S. export markets. Many of these foreign refinery projects are being advanced with significant government support as a means of creating self-sufficiency and energy security, rather than being driven by economics. These trends threaten not only commercial competitiveness but long-term U.S. energy security and geopolitical influence.

The solution isn't that the U.S. government should build refineries... 

I just wish the government would stop preventing them from being built... whether through stringent federal regulation or local legal actions.

Our government is preventing our industrial base from growing while spending our tax dollars on hamster cage matches, treadmill-running fish, pigeons playing slot machines, and coked-up quail. Foreign governments are using their citizens' money to build oil refineries that, in China's case, already rival the U.S.'s formidable but flagging capacity.

I suspect that, if the U.S. got out of the way of its domestic industry, America is wealthy enough to regain and maintain adequate supplies of all the things that are now mostly made in China and elsewhere, but which we need to keep living well.

This year, the Iran war has already damaged about a dozen Middle Eastern refineries. And Asian refineries dependent on Middle Eastern supplies are struggling to get crude oil to process.

U.S. refiners are picking up the slack, running all out at full capacity to supply domestic and international markets. They even skipped their usual spring maintenance procedures, which they use to switch over to summer fuel blends.

Putting off maintenance is not a sustainable practice. It's not how you build a strong industrial base. It's how you weaken whatever industry you have left.

What this means for you...

The point of today's Digest isn't only that politicians are screwing everything up (even though they are). It's that through their backward priorities, they've opened up a potent investment opportunity.

Right now, you want to own the existing refineries and other makers and processors of critical materials that support our standard of living. They're making plenty of money, and they're not putting it into building new facilities.

Until it gets easier to build new infrastructure, they're more likely to use their windfall to buy back shares, raise dividends, and pay down debts. These actions go straight to shareholders.

Ferris Report subscribers who followed my December recommendations are sitting on two winning positions in refinery companies. Both stocks are up around 90% since my recommendation, and I still rate them both as buys.

I'd rather see them invest in new facilities and grow their businesses. There's a lot more long-term upside there, both for investors and for every citizen of our great republic. But the near-term and long-term trends are aligned – and both support buying shares of America's oil refiners.

New 52-week highs (as of 7/23/26): Alpha Architect 1-3 Month Box Fund (BOXX), Canadian National Railway (CNI), iMGP DBi Managed Futures Strategy Fund (DBMF), Quest Diagnostics (DGX), Illumina (ILMN), Kayne Anderson Energy Infrastructure Fund (KYN), Omega Healthcare Investors (OHI), Plains All American Pipeline (PAA), USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI), Travelers (TRV), Union Pacific (UNP), and Invesco DB U.S. Dollar Index Bullish Fund (UUP).

In today's mail, thoughts on the chart of "circular" AI investments that Nick Koziol shared on Wednesday, plus feedback on the latest developments in the Middle East, which Corey McLaughlin wrote about yesterday... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Thanks for the graphic Nick. It shows the incestuous relationship among these [AI] companies using a picture that was probably created using Adobe!" – Subscriber Rodger G.

"So now it's the Houthis again? Thought we supposedly shut them down a while back. Now suddenly they're a big global power again? Shutting down world trade?... Seriously?" – Subscriber Greg F.

Good investing,

Dan Ferris
Medford, Oregon
July 24, 2026