Oil refining's perception problem has taken a new, unflattering turn: Not only are there not enough U.S. refineries, they don't run right.
After several years of calls for more production capacity in one of the world's most technically sophisticated industries, attention has shifted to what appears to be an unusual number of breakdowns and extended downtime that has raised concerns about the adequacy of oil-product supplies.
Just about every day in recent weeks, a period when refineries ramp up production, unit malfunctions, fires and other mishaps have had oil traders and market watchers riveted. Oil futures and wholesale prices have staged breathtaking rallies that traders say are due to the prospect of lost supply and falling inventories.
This is an issue the US will have to come to grips with over the next few years. So long as the US is dependent on gas for a variety of necessary economic functions all of the parties involved -- but primarily business and environmental concerns -- are going to have to figure out a way to deal with the situation.
4 comments:
I don't see why anybody should be surprised here. For a refinery, they achieve maximum profitability when:
1) Cost of gasoline is high
2) They are running as close to operational capacity as possible
If they have break downs, sure that's bad for them in terms of output from any one refinery, but it ends up causing prices to go up and so they are at able to make up for it. Why build more refineries when doing so will end up driving down the price of what they are producing?
To solve this would be trivial. Just pass a law that requires refiners to maintain a certain percentage of excess capacity as we require banks to always have a certain amount of cash on hand. This would reduce price spikes, and insure that we do not have supply shortages.
There was (it has now vanished) an interesting interview on Bloomberg, in which an analyst from an Australian bank points out that Europe needs a different mix of gasoline vs. other petroleum fractions than does the US. The US has lots of driving, while Europe has far less, while Europe may have a greater need for heating fuels and chemical feedstocks. This is one reason that refinery capacity has been kept so low in the US.
However, the accidents... that's really bad and shows poor management. However much they make in excess profits, they lose in public anger, shareholder irritation, and ultimate regulation.
--Charles of MercuryRising
www.phoenixwoman.wordpress.com
sterno raises a good point. With inelastic short-term demand for gasoline and production capacity just barely keeping up with demand, this gives a financial incentive for refiners to game the system. We saw this in the electricity crisis in California - power plants would get rid of extra parts so it would take them longer to fix problems. I would be very surprised if refiners did not try to take advantage of the system. Unfortunately for us, there's a finite amount of oil that can be produced, so we're going to be at the mercy of refiners so long as we use gasoline.
a little knowledge is a dangerous thing as the above posts show.
1) the refining system has been steadily growing in capacity since 1990. Just go look at the DOE data. Capacity has not been "kept low". It grew even in periods where refiners had terrible profitability. Don't remember anyone shedding any tears then (nor should they have).
2) Europeans do lean heavily on diesel such that they optimize their refineries in that direction. Excess gasoline production flows from Europe to the US.
3) These fires and other problems are typical of shutdown season. Happens every year. As units are starting up/shutting down they are obviously going through all sorts pressure/flow/temp changes. One little operator error or a flange spreading etc and you have a fire. On startup, if someone leaves a bit of crap in a line or fails to open some stray valve, you get can get a fire. If a repair weld fails etc etc.
These are very complex beasts and mistakes happen. This is not "gaming the system". Chevron doesn't blow up their refinery so Conoco can reap the reward. The refinery management's bonus is keyed to production more than margin. Not to mention, killing your employees is extremely expensive as BP discovered.
Demand has grown faster than refinery capacity. Give up the Hummers and the problem goes away without any money spent. Raise CAFE standards and conserve instead of bitching about the refiners.
As for Sterno's suggestion. ho ho ho. Do you really want a national PUC guaranteeing the refiners a margin on unused capacity? That's the deal you'd have to make. If you force them to install capacity they don't need, you have to compensate them just like the electic utility business.
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