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Lack of US refining capacity is partly to blame when gasoline prices spike.
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Oil and Refineries
By STEVE AUSTIN for OIL-PRICE
The debate is raging in full swing: the dearth of new refineries in the US. Many are surprised to see the continued increase in oil prices
despite the surge in domestic oil production. Could refineries be the
missing element in the equation, they wonder. 'Why not just build new
refineries and scale down the price of oil,' our readers continue to ask
us. Yes, it's a fact- no new refinery has been built in the US in the past three decades.
The last refinery constructed in the US at Garyville, Louisiana was way
back in 1976. So, the question is reiterated as the point is so
obvious: new refineries. But then, there aren't any easy three reasons,
nor is the dimension only four.
First though, let's take a look at the prevailing price of oil.
According to a AAA fuel gauge report, the national average for a gallon
of gasoline is $3.62 - more than 13 cents from the previous week and 24
cents more than a month ago. After the fall in May and June, gasoline
prices have increased gradually for the last seven weeks, adding pain to
the already pained consumer. Is this because of dwindling oil reserves?
Well, of late domestic oil production has increased by fourteen percent
in the last 12 months. According to government sources, the oil
production in the country hit the highest 'quarterly level' in almost a
decade (for the first three months of this year). And, US produces 55
percent of the oil consumed in the country, mainly due to production
spikes in Texas and North Dakota.
Clearly there is oil, so shouldn't the oil price decrease? After all,
the more the commodity, often, lesser is the prices. Put it that way,
the present oil prices do sound ominous. It's not as if higher demand
has hiked the oil prices. On the contrary, demand for oil has been
decreasing with fuel efficient cars and
ethanol blended gasoline.
This July, crude oil demand in the U.S. dipped to its lowest in four
years on the back of average economic growth in the country, according
to the
American Petroleum Institute.
The demand for gasoline fell 3.8 percent this July with consumption
down 1.1 percent. After the peak in 2007, demand for gasoline has been
sluggish. That is, despite increase in the price of crude, demand for
gasoline is at record low. So, the speculation does gain force - are lack of refineries hampering the fall in the price of oil? North Dakota
produces more than 600,000 barrel/month but has only one refinery in
Mandan. An element of bafflement does linger to see the country
producing substantial oil and yet importing refined products.
There is colossal gap in the realm of production and refining capacity
in the country. The refineries are churning at full capacity which makes
them profitable, but on the downside there is no room for mistake. They
have to deal with variable demand on one hand and higher costs of
inputs on the other. Recently,
Sunoco Inc.
announced closure of its largest refinery leading to fears of fuel
shortage and higher oil prices in the US. Fortunately, a deal with the
Carlyle Group
saved the day for Sunoco Inc. and the oil industry. But, the problems
in the refining sector are far from over. Two refineries owned by Sunoco
Inc. did close in the last eight months, which means a loss of nearly
half the gasoline and other refined products in the East coast.
True, new technologies have increased the domestic oil production. For
once, though, the infrastructure in the US has failed to catch up with
the surging domestic oil production. Barges, rails and trucks, believe
it or not, still transport crude. Naturally, the oil barely reaches the
refineries and this mode of transport also makes oil more expensive for
the consumer. How about pipelines? We know that imported oil is
expensive. Still, the Marcus Hook refinery continued to import oil at
$114 a barrel in 2011, even when the West Texas Intermediate crude
traded lower. Why? Lack of pipelines, again. And with this paucity in
pipelines, crude produced in the country isn't reaching the refineries.
Of course, the much hyped Keystone XL pipeline would connect Canada's oil with refineries in the Gulf of Mexico and Houston, but that may take years.
Staying with refineries, the need for pipelines is more pronounced in
the Gulf coast. The refineries in the Gulf coast contribute about 45
percent of the refining capacity, and 30 percent total crude oil
production in the US. Of late, the imports have declined in the Gulf
coast, thanks to drilling in the
Eagle Ford Shale in Texas and Bakken shale in ND.
Unsurprisingly, import of the more expensive light sweet Nigerian crude
stood at 150,000 b/d in January, the lowest since 1996. (For the
corresponding period, there's decline in the import of Nigerian crude to
the East coast too.) Yet, imagine the figure with more pipelines in the
region. Yes, the crude from Eagle Ford from Texas has started to arrive
in the Gulf coast. However,
the crude is sweet light.
Most of the refineries in the Gulf Coast are more sophisticated,
designed to process heavy and more sour crude. As investment to refine
the lighter sweet crude is expensive, the only option for the refineries
is to blend the different crudes. The irony.
Meanwhile, woes of the refineries in the East coast continue. Two have
already closed, and the rest of them are barely managing to scrap
through. These refineries are dependent on imported crude as they don't
have easier access to cheaper West Texas Intermediate
crude. Hence, they continue to import the expensive Brent crude. There
are plans to transport oil from North Dakota to the East coast by rail,
but when?
Although a continuation of the import story, the scene is slightly
different in the Midwest. The refineries here are enjoying higher
profits, credit to generous supplies from Canada and domestic oil.
Imports from Canada reached 1.76 million barrels a day in the first
quarter of 2012, an increase of almost 22 percent from last year
(Source: EIA). Unsurprisingly, Canada is the largest supplier of crude
to the US followed by Saudi Arabia.
Recently the Port Arthur refinery underwent expansion to almost double
its daily capacity. So, why do refineries expand rather than build new
ones? It's easier because of the environmental regulations. The apparent
lack of logic in not having refineries does get answered when you take
the environment under consideration. Refineries gobble up water, not to
mention vast tracts of land, and contribute loads of CO2 to the air, as
well. So, environmental regulation tends to be hard for anyone
interested in refineries. The EPA regulations are also strict on the
sulfur content Light crude is easier to process, has lower sulfur
content so it's easier to get the environmental nod. Heavy sour crude,
on the other side, has more sulfur and is more difficult to process.
Sunoco Inc. is said to have lost $ 1 billion in the last three years,
attempting to upgrade in accordance with the stricter EPA regulation.
Will the picture change? Everyone wants refineries, just is someone
else's backyard. The new EPA regulation for new refineries scheduled to
be released this November has been deferred because of the Presidential
elections. How is it going to pan out? Mitt Romney is all for more
drilling. He wants to drill "virtually every part of U.S. lands and
waters" but is silent on his take on refineries. For his part, Obama is
for 'energy independence' but with his strict environmental laws, no
refinery is going to come up anytime soon. The situation is precarious.
The demand isn't expected to rise anytime soon. EIA has lowered the
forecast of oil consumption in 2012 and 2013.
Any destruction due to accidents (like the recent fires), weather
conditions, and maintenance would affect the supply with immediate
effect. For instance, the recent fire in the Chevron refinery at
Richmond, California disrupted almost 16% of the supply in the region.
Abundant reserves, yet prone to import fluctuations- which country would
want to continue in this position?
If the refineries aren't taken care of, the dream of cheaper crude would
continue to be a dream. That would be sad with the present domestic
resources.
