"The Missing Link" in oil price - Oil and Refineries.(
OPN).By SteveAustin.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.
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. Read the full story
here.
