Planet Gore

The Coming Crisis in U.S. Refining Capacity

In a few years, when Democrats accuse the refining industry of gouging Americans at the pump, please direct them to this New York Times article on the economics of the refining industry:

Only a few years ago, a cry went up that the United States needed more oil refineries. The perceived shortage was so acute that George W. Bush, president at the time, even offered disused military bases as sites for building them.

Not only did that never come to pass, but the reverse is now happening. The business of oil refining is mired in a deep crisis, with five refineries having shut down this year, including plants in Delaware, New Jersey, California and New Mexico.

Gasoline demand, which many analysts had long expected to keep rising for decades, is down sharply in the recession. And refiners are increasingly convinced that even after the economy recovers, demand will not grow much in coming years because of the rise of alternative fuel supplies and the advent of tougher efficiency standards for automobiles.

The recent closings signal the end of a period from roughly 2004 to 2008, when demand soared, refineries operated near capacity and profits swelled. For drivers, that meant gasoline prices at $3 or $4 a gallon, especially when hurricanes knocked out refining capacity on the Gulf Coast. For refiners, this gilded period turned out to have been an anomaly.

Plagued by boom-and-bust cycles of rapid expansion followed by sharp belt-tightening, refining companies have often struggled to operate at a profit. That is a contrast to the production side of the oil business, long a road to riches.

“Oil production creates wealth, but oil refining has often destroyed it,” said Costanza Jacazio, an analyst at Barclays Capital in New York.

Even so, these are unusually harsh times for oil refiners. The recent drop in gasoline demand could result in more refineries being closed in the coming year.

“We have too much capacity,” said Lynn D. Westfall, the chief economist at the Tesoro Corporation, a midsize refiner, who estimated that the industry’s capacity of 18 million barrels a day must be cut 5 to 8 percent. “We need refineries to be shut down.”

Refineries, especially smaller ones, have been closing for many years. The number of refineries in the United States fell to about 150 in recent years from more than 300 in 1982. At the same time, the nation’s refining capacity grew by about 13 percent, as companies expanded their most efficient refineries.

But the shutdowns are now coming so fast that the United States is losing capacity as refiners struggle to match their output to falling demand. Some energy experts have said that gasoline consumption most likely peaked in 2007, when it reached 9.7 million barrels a day, and will not rise to that level again.

Even as demand has dropped, gasoline is still relatively expensive because of high oil prices. Gasoline prices have dropped to an average of $2.58 a gallon, according to the motorist group AAA, with many analysts predicting further declines this winter.

Gasoline consumption fell 3.5 percent last year, the steepest decline since 1965, while diesel consumption fell 6.8 percent, the most in 28 years. Both are set to fall again this year.

Government mandates for ethanol, meanwhile, are expected to grow through 2022. Biofuel supplies, which were negligible a few years ago, are set to reach 15 billion gallons in 2012 and 36 billion gallons in 2022. As production grows, ethanol and other biofuels displace gasoline and diesel; at many gasoline pumps ethanol is now 10 percent of the blend, and the ethanol industry is pushing to raise the percentage.

The refining industry is also faced with a new political reality. Unlike the Bush administration, which offered support and incentives to petroleum producers, the goal of the Obama administration is to encourage alternative fuels and reduce the use of gasoline.

Refiners are complaining about the climate change legislation is making its way through Congress, fearing that it will impose higher costs on the petroleum industry and result in more gasoline imports from lower-cost refiners overseas.

The rest here.

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