The Refinery Shortage Lie

[norml]

It is a lie, that there is a refinery shortage, and that it is responsible for the high price of gasoline. The price of gasoline is high, because the price per barrel of oil is high. If the Saudis, or anyone, were to dump more oil on the world market, the price per barrel would go down. The price per barrel of oil is set at the same price everywhere. It is determined by world supply, and world demand . It has nothing to do with refineries, except that a real shortage of refining capacity would lower the price per barrel of oil, by lowering overall demand.

http://www.eia.doe.gov/oil_gas/petroleum/info_glance/refineryops.html

[Montauk6]

1. A simple test?

Isn't it true that profit should remain consistent before and after the price hike (if it's, indeed, all about the supply)?

[norml]

2. The profit for who? Profits would be up for the suppliers, down for the

retailers.

[Montauk6]

4. I meant the oil companies, which I guess would be the suppliers

[Psephos]

3. From your reference, I saw refinery utilization figures of 92-94%

Wow, that is extremely close to full utilization. Remember, maintenance down-time, refitting for summer blends and specialty markets (California, e.g.), and normal operation inefficiencies (transportation glitches, suboptimal cracking based on differing base stock chemistries, etc.) all have to come out of the margin between current utilization and theoretical maximum. 6-8% cushion for all these things is t-i-g-h-t. Ask any petroleum engineer.

The lie, in my opinion, is that any system can run near its theoretical maximums for long before there is trouble. I'm not just talking about refineries here. The world is consuming nearly all the oil that's being produced right now. Unforeseen problems are part of life, and if one strikes the oil supply chain while it is under its current stresses, price could rise substantially until the problem is fixed.

Peace.

[Liberal In Texas]

5. Glad to see you post this Norml

...from Nebraska myself (boy I spent my time there...)

That's exactly correct. It's one of the new "talking points" the repugs are fielding.

You paying $2+ it's because we don't have enough refineries. Complete bull.

I really think this came about because the Kool Aid drinkers are starting to balk at the price at the pump. Remember, back before the Iraq war started, we were going to have all this oil coming in? (Not only to pay for the war, but to rebuild the Iraq economy ya da ya da ya...?)

Well, hmmmm, that didn't happen. Neither did the welcoming committee with the chocolates and flowers tossed at the conquering troops.

Randi Rhodes summed it pretty well today. The Iraqi's no longer own that oil. The World Bank does. The World Bank has given the oil to major oil companies. The oil companies are selling it to the highest bidder and making tons of money.

Remember the war was about oil, not that we're going to profit from it, but the oil companies would.

Like I said, if you listen to AM radio (of course not AAR) the new talking point is that we don't have enough refineries. It's all BS.

If there had been an escalating need for refineries, they would have been built. There isn't. It's a false reason, much like when Enron caused brown-outs in California.

They're fucking with us.

Pure and simple.

[LdyGuique]

6. Some more oil production/refining/tanker statistics

I just did some quick research on the issue and came across several different sets of statistics:

American Petroleum Industry Statistics

Domestic crude oil production fell 3.5 percent for the quarter with a 3.1 percent decline for the lower 48 and a 5.3 percent drop for Alaska, API said.

Refineries also set records in the first quarter. The utilization rate for the first three months of 2005 averaged 91.7 percent of capacity, the highest for the first quarter in seven years, API said. March’s utilization rate, at 92.2 percent, was also the highest for that month in seven years, API reported.

Gasoline production, which rose 1.2 percent over year-ago levels, set a record first-quarter high of 8.45 million barrels per day, as did output of distillate fuel oil, up nearly 7 percent to 3.79 million barrels per day, API said.

Oil Tankers -- how much capacity does the tanker industry have to transport oil, regardless of how much is pumped or refined?

On Wednesday, April 6, 2005 --
Oil tanker shortage looms as UN sets ban
By Will Kennedy and Kyunghee Park Bloomberg News

<snip>
The United Nations' International Convention for the Prevention of Pollution from Ships was amended to accelerate the phase-out after a ship named the Prestige sank off the coast of Spain in November 2002 while carrying 77,000 tons of fuel oil. Double hulls, mandatory in all tankers built since the mid-1990s, reduce the risk of pollution if a ship is damaged in an accident.

The phase-out of ships is staggered by their age. Tankers built before 1977 and those with certain kinds of cargo tank structures were required to cease operation by Tuesday. As tankers reach the 26-year-old mark over the next five years, they must be phased out. All remaining single-hulled tankers are set to be abolished in 2010.
<snip>
The rules that came into force Tuesday also ban single-hulled tankers from carrying fuel oil, which is one of the dirtiest products of oil and is used in power generation.
<snip>
South Korea will deny entry into its ports of single-hulled tankers. Starting Tuesday, South Korean companies have been banned from operating single-hulled oil tankers that have a capacity of more than 5,000 tons, the Ministry of Maritime Affairs and Fisheries said.

The government will also refuse entry of such ships operated by overseas companies into its ports, it said.

Note: While this doesn't apply to the overall issue, it's something that I had no idea about and found environmentally appalling--it's part of the same tanker article

Most of the ships abolished under the UN rules will be dismantled on beaches in Bangladesh and India, the world's two biggest markets for ship scrap, a practice criticized by the environmental organization Greenpeace.

The worldwide ban on single-hulled tankers that went into effect Tuesday "threatens to dump thousands of toxic ships on Asian and Turkish beaches," Greenpeace said. "Workers in India and China break up European vessels in appalling conditions with no protection from explosions, asbestos and a cocktail of toxic chemicals contained within the ships."

The South Korean shipyards, which build most of the double-hulled supertankers are at capacity building other ships and won't be able to deliver any new supertankers until 2008, only 2 years out from the 2010 cutoff.

[Liberal In Texas]

7. errrrr

I just waded (pardon the pun) through that, and my eyes started spinning.

Boiled down?????

[LdyGuique]

9. I thought that was boiled down --

However, at this time oil extraction is at near peak capacity throughout the world; oil refining is at near peak refining capabilities; and oil tankers are being taken offline that were transporting the crude oil from between the extracters and the refiners -- which will cause an unknown amount of shortage both on an immediate basis and throughout the next several years.

[TreasonousBastard]

10. "Blue water" ships have always been...

considered to have a pretty short life, and 30 years is pretty much the long end of it, so one would think the tanker operators would have planned for this with or without the double-hull requirement.

Well, the cheap bastards often don't plan for much besides the next cargo, so, naturally, they are running up against a deadline.

Back in the '70s, South Korea became the world's shipbuilder, with over half the tonnage being built there. They have managed to consolidate it even more, and everyone else has pretty much abandoned shibuilding, except for some subsidy work and vanity building. And Navy work, of course. I imagine some tonnage is being built at a few yards here and there, but it would be heavily subsidized.

Not to say the great shipbuilding operations of Scotland, Poland, Germany, Japan, the US, etc, couldn't be seriously ramped up again, but it doesn't seem like that's going to happen soon. Korea just does too damn good a job building a good ship at a cheap price, and most subsidy programs have been trashed.

The Asian shipbreakers are spectacular, if incredibly poisonous. If you want to dismantle a ship here, you drydock it and go through the usual hoops to try to contain the nasties. Some of it is still done here, but not with the big ships. Taiwan used to be the big guy in taking ships apart, then India got into the game. I don't know who all is doing it now.

They have beaches for this. You take a skeleton crew and run the ship up on the beach as fast as you dare, then hundreds of rather small men run out to it with wrenches, torches, cranes... you name it, and start cutting it up right where it sits on the beach. Then the copper, aluminum, steel, etc is shipped out and sold.

One hell of a mess it makes, but it is spectacular to watch.

[coda]

20. If margins are good enough (long term), they'll build them

Expanding and revamping makes sense because the surrounding infrastructure is there. It's a lot more expensive to build in a new place and have redirect underground lines.




From 1992 to 2002, the rate of return for U.S. refiners was about 5.5
percent, compared with a 12.7 percent rate of return for the
industrial sector of the S&P 500 companies, according to Rayola
Dougher, senior policy analyst for the Washington-based American
Petroleum Institute.

[TreasonousBastard]

8. Both are true...

raw materials affect the price of finished goods, and the means of production to finish those goods also affects the price. Both are simple supply and demand equations.

Up until the late 80's my job was insuring oil, tankers, refineries, tank farms, etc, so I have some handle on this.

Refineries are stretched to the limit. I know Exxon built one, or was building one, in Malaysia or some damn place, but other than that there have been precious few built. None in the US in 30 years or so. Once, we had a tanker full of contaminated gasoline, and it took a solid month to find the capacity to rerefine it. We had to move it from the Indian Ocean to Curacao to get it done. That was a while ago, and it would probably be even more difficult now.

Most working oilfields are at their pumping capacity, and refineries are working overtime. With rising demand and no corresponding increase in crude production or refinery capacity, prices go up.

[sandnsea]

11. Refineries were upgraded and expanded

I just read an article on it last week. It's true there are less refineries, but that's because they've consolidated the ones we've got. Increased productivity. New technologies make them more efficient. While the world may need more refineries because of increased oil consumption, pointing to straight statistics on the number of US refineries is misleading. There's more to it than that.

[TreasonousBastard]

16. But not expanded enough to meet rising demand.

We don't even use all the oil we're presently extracting from Alaska because there is no West Coast refinery capacity for all of it.

We send it to Japan.

[sandnsea]

19. Not right now

Alaska stopped exporting oil in 2000.

Our refining capacity is nearly the same as in 1982, with significantly fewer refineries.

http://www.eia.doe.gov/emeu/finance/mergers/refcap_tab2.html

Adjusted for inflation, gas is exactly the same price as it was in 1982. The refinery argument makes no sense.

[Liberal In Texas]

13. OK, question then...

BTW...many excellent posts here, you guys obviously know what the heck you talking about...

The question is...It's a profit/loss kind of industry. Are they so stupid that they don't know when tankers expire, new refineries are needed, or when Gus down the hall will fall over from an heart attack?

These are billion dollar industries...and all of a sudden the tankers are falling apart, we don't have enough cracking plants?

WTF?

I'm just saying...or maybe asking...

[TreasonousBastard]

18. It's not that simple...

to build a refinery. Costs a bundle, and every time they talk about building a new one, the citizens take action and stop it.

They don't drill for all that oil off the Florida coast either, thanks to Jeb Bush using that as his one sop to the Florida environmentalists.

As far as the tankers go, it's not only the major oil companies that build and own them. Many, if not most, are private operators that charter them out when there's oil to be moved. Not only are many of them incredibly cheap and shortsighted, but historically there have been times when tankers are laid up, so operators are hesitant to build when there's no guarantee they'll be used.

With the double-hull requirement and huge increased demand, one would think they would see the need to build, but by the time they saw that, the shipyards were backordered.

I don't know what a 500,000 ton ULCC costs now, but it's probably a few hundred million, and that's a lot of scratch to come up with when you order 5 or 10 of them. So, after you see the demand and get the financing, you get on a waiting list at one of the few shipyards that can build these things.

[tedzbear]

12. I do not agree.

"...a real shortage of refining capacity would lower the price per barrel of oil, by lowering overall demand."

Ha! It's the opposite, silly. It doesn't matter WHERE the bottle neck is, the price of a commodity always rises if there is a shortage of supply. It's called SUPPLY AND DEMAND.

The only way the price of oil will drop is if there is a drop in demand for gasoline at the pump.

[Liberal In Texas]

14. But that's what's not really apparent.

The price of oil effects the price of your loaf of bread, or cup of coffee. It's all trucked in, with, guess what? Oil.

Or deisel, or gasoline or biodiesel if they are really good guys.

Even the plastic in the keyboard you're typing on, was made with oil.

It's a real insidious chain.

When the price of oil goes up, so does every consuer product in the nation.

EVER ONE. It's just not at the pumps, it's EVERYTHING.

[LdyGuique]

15. Just an add-on for those interested in a good graphic about

the refining or distillization process that produces various types of petroleum products graphic

Here's the text part --

Different hydrocarbon chain lengths all have progressively higher boiling points, so they can all be separated by distillation. This is what happens in an oil refinery - in one part of the process, crude oil is heated and the different chains are pulled out by their vaporization temperatures. Each different chain length has a different property that makes it useful in a different way.

To understand the diversity contained in crude oil, and to understand why refining crude oil is so important in our society, look through the following list of products that come from crude oil:

Petroleum gas - used for heating, cooking, making plastics
small alkanes (1 to 4 carbon atoms)
commonly known by the names methane, ethane, propane, butane
boiling range = less than 104 degrees Fahrenheit / 40 degrees Celsius
often liquified under pressure to create LPG (liquified petroleum gas)

Naphtha or Ligroin - intermediate that will be further processed to make gasoline
mix of 5 to 9 carbon atom alkanes
boiling range = 140 to 212 degrees Fahrenheit / 60 to 100 degrees Celsius

Gasoline - motor fuel liquid
mix of alkanes and cycloalkanes (5 to 12 carbon atoms)
boiling range = 104 to 401 degrees Fahrenheit / 40 to 205 degrees Celsius

Kerosene - fuel for jet engines and tractors; starting material for making other products liquid
mix of alkanes (10 to 18 carbons) and aromatics
boiling range = 350 to 617 degrees Fahrenheit / 175 to 325 degrees Celsius

Gas oil or Diesel distillate - used for diesel fuel and heating oil; starting material for making other products liquid
alkanes containing 12 or more carbon atoms
boiling range = 482 to 662 degrees Fahrenheit / 250 to 350 degrees Celsius

Lubricating oil - used for motor oil, grease, other lubricants liquid
long chain (20 to 50 carbon atoms) alkanes, cycloalkanes, aromatics
boiling range = 572 to 700 degrees Fahrenheit / 300 to 370 degrees Celsius

Heavy gas or Fuel oil - used for industrial fuel; starting material for making other products liquid
long chain (20 to 70 carbon atoms) alkanes, cycloalkanes, aromatics
boiling range = 700 to 1112 degrees Fahrenheit / 370 to 600 degrees Celsius

Residuals - coke, asphalt, tar, waxes; starting material for making other products solid
multiple-ringed compounds with 70 or more carbon atoms
boiling range = greater than 1112 degrees Fahrenheit / 600 degrees Celsius

[toddaa]

17. It's the tree huggers fault

That's the latest talking point being tossed out. The reason we don't have enough refineries is because the environmental extremists have made it too expensive for the poor and helpless oil companies to operate.

[Bridget Burke]

22. Of course.

Look at Shrub's work with the oil industry while he was governor. Problems with regulations? Cancel them. Try "self-regulation".

It's just too expensive to build refineries, since some minimal environmental regulations still stand. Many of the old ones have "grandfather clauses" so they can keep belching out poison.

Stories on the Texas City refinery blast that killed 15 have made it clear that the industry is NOT REGULATED ENOUGH. But tort reform in Texas has made it cheaper to let a few employees die from time to time than replace worn equipment--or follow proper standards.

Maybe if all the regulations were repealed, the oil companies would do us a big favor. But why should they? They keep getting richer & buying more politicians.

[Democrats_win]

21. Saudi prince says its speculators in oil market making prices high

Market speculation is also part of the problem. This time of year demand rises and any disruption of the market could send prices much higher. The market is speculating that this will happen.

When it doesn't happen and demand falls, prices will fall too.