As a follow up to my October 11th post outlining the factors “not Obama” that are increasing gasoline prices, I was challenged by the same anti-Obama businessman I mentioned to explain this “supposed” refining capacity bottleneck.
Ok… here ’tis:
Here’s the bottleneck in a graph. No matter how much crude oil is brought out of the ground or imported, the bottleneck is that US refining capacity has not increased in over a decade (actually you’ll see later, it’s about two decades). That folks is what’s called a “bottleneck.” Very simple. The gap between demand and what we have the capacity to refine is imported at substantially higher costs.
“Yeah, well, you know dude, the free market will fix that!”
Really? ‘Cause here’s the federal EIA outlook up until 2030. Um…barely any capacity improvement. And the gap between demand and what the US can refine: goes from a shortfall of a little more than 3 million barrels of oil per day to a gap of almost 8 million barrels of oil per day. The gap is made up by importing expensive refined product from abroad.
Ooops! Looks like a lack of energy industry progress.
Now, let’s look at what the energy industry and the feds have to say about our refining capacity and the coming urgent problems:
From U.S. Energy Information Administration (EIA), “Refining: Petroleum & Other Liquids”
“U.S. refining capacity, as measured by daily processing capacity of crude oil distillation units alone, has appeared relatively stable in recent decades, at about 16 million barrels per day of operable capacity—the level is a reduction from the capacity of twenty years ago. …the first refineries were shut down as demand fell in the early 1980’s. …additional refineries were shut down in the late 1980’s and during the 1990’s, always, of course, those at the least profitable end of a company’s asset portfolio.”
The report notes a mediating factor: “At the same time, refiners improved the efficiency of the crude oil distillation units that remained in service by “debottlenecking” [internally] to improve the flow and to match capacity among different units and by turning more and more to computer control of the processing.”
Nonetheless two contravening facts deny the relief of improved capacity utilization efficiencies so that refineries continue to function as “the bottleneck:” 1) Continued shut down of refinery facilities reducing total potential capacity levels and 2) A turn to exporting American refined oil products to industrializing, higher profit margin international markets.
From ”Rising Gasoline Prices 2012,” Congressional Research Service (R42382), March 1, 2012
“Two large oil refiners in the Northeast, Sunoco and ConocoPhillips, have decided to close refining assets. Sunoco announced the closure of its Marcus Hook, Pennsylvania refinery on December 1, 2011, followed by ConocoPhillip’s closure of its Trainer, Pennsylvania refinery later that month. Sunoco also plans to close, its Philadelphia refinery. Together, these three refineries comprise over 50% of refining capacity in the Northeast. Higher wholesale price margins would be required in the Northeast to draw supplies from other areas to make up for the loss in refining capacity.”
“Separately, the Hovensa Refinery in the U.S. Virgin Islands is also closing. Most U.S. refined product imports from Europe and the Virgin Islands go the East Coast.”
“Europe, a major source of U.S. gasoline imports, has also experienced a reduction in refining capacity recently. It has been reported that Petroplus, the largest European independent refiner, has begun shutting down three of its five refineries. (As a result of these closures, Europe may also seek to draw greater supplies of diesel fuel from U.S. refineries.)”
From EIA February 2012 Executive Summary of Report. “Potential Impacts of Reductions in Refinery Activity on Northeast Petroleum Product Markets”
“…price impacts are highly uncertain. …in the short term, prices can spike. In the longer run, higher prices and possibly higher price volatility can result…loss of the Sunoco Philadelphia refinery presents a complex supply challenge, and no single solution has been identified by industry participants… The industry will have a financial incentive to serve all markets in the Northeast, and companies are currently investigating options. However, companies are not [soon] likely to make significant investments in new logistical arrangements…”
From The White House, March 11, 2012, “A Secure Energy Future: A Progress Report.”
The U.S. refiners export gasoline, and that shrinks national supply. Though placing a positive spin by extolling the virtues of a “world-class refining sector,” the report revealed a “refining sector that last year was a net exporter for the first time in sixty years.”
Report by Ron Scherer at the Christian Science Monitor, ““As Gas Prices Rise, Should US Oil Industry Stop Exporting?”
The oil industry maintains it must export to stabilize profits and avoid layoffs. Observers contend the new status of refiners as “net exporter[s] for the first time in sixty years” keeps domestic supply low and gas prices high.
“The oil industry maintains the exports are necessary because domestic demand is weak. The industry says if refiners could not send American-made gasoline to China, India, Europe, and South America, the refineries would have to close as several have already done on the East Coast. Yet, other energy observers say exporting gasoline at a time of rising prices is sort of like throwing flammable liquid on a fire.”
TADA! US Refining Bottleneck!
Not the fault of Obama… the fault of industry.