Oil refining capacity down in NA, world production up: Can this go on?
Thursday, January 28, 2010 at 05:24PM
At the time of Hurricane Katrina, consumers in North America saw gas prices rise sharply—even before the Hurricane actually swept through the Gulf of Mexico and destroyed New Orleans—on the possibility that oil refineries in the Gulf might be damaged by the hurricane and thus cut supply. It seemed at the time that there must be an acute shortage of refining capacity in North America if the loss of two or three refineries was enough to seriously disrupt supply for the entire continent. There was a lot of talk of building more refineries to protect consumers from wild price swings caused by disruptions to supply. It seemed like a good idea at the time.
It didn't happen, though. In fact, refining capacity is down as refineries across the US have shut down. Gasoline demand is down too. Last year, according to The New York Times, demand was down 3.5% and will fall again this year. And with all the talk of alternative energy sources, better fuel efficiency, and electric cars, refiners don't see demand for gasoline ever reaching peak levels of the mid 2000s when demand soared—the price of oil reached $147 a barrel in 2008, before dropping back to half that now. The present industry capacity of 18 million barrels a day in the US is too much, according to one refiner, and should be cut by 5 to 8 percent.
This would mean more refineries shutting down, and it's already happening. The Valero Energy Corporation, America's largest refiner, shut down a 210,000-barrel-a-day refinery in Delaware. Another 160,000 barrels a day were lost when Sunoco and Western Refining closed plants in New Jersey and New Mexico. Chevron is cutting refining jobs and considering getting out of some markets.
Even the oil industry heavies have been experiencing difficulties making money at refining. Exxon Mobil's earnings of $2.7 billion in global refining business fell to $325 million in the third quarter of 2009; Chevron's quarterly earnings from domestic refining plunged to $34 million from $1 billion a year earlier. Occidental Petroleum has said it has "no interest" in acquiring refining capacity because of poor ROI prospects. Shell is expected to report a fourth quarter loss on its refining operations.
But oil production continues to grow. In Canada's tar sands, where $100 billion worth of new projects were cancelled or postponed after the onset of the economic crisis of 2008, oil companies are investing again. Shell, along with partners Chevron and Marathon Oil, has scaled back development of the Athabasca tar sands, citing high costs and the availability of other oil, notably in Iraq. Shell currently produces 150,000 barrels a day and will increase that to 250,000 bpd. It had intended to increase to 750,000 bpd.
On the other hand, ConocoPhillips and Total announced a week ago that they are quadrupling production of the tar sands to 110,000 barrels a day by 2015. In the summer of 2008, crude oil reached an all-time high of US147 a barrel, but that price has been cut in half.
Canada's oil output is expected to reach 3.26 million barrels per day in 2010 and with 1.92 million barrels per day going to the US, Canada is the main supplier to the world's biggest consumer of oil.
The Obama administration approved a 1600-kilometer pipeline to carry up to 800,000 barrels of oil a day from the tar sands to American refineries. It's estimated that more than $30 billion will need to be invested to transport and refine this oil. However, opposition to what is called "dirty oil" is growing in the US. A new law, yet to be enforced by Congress, prohibits the federal government from procuring fuels with a higher greenhouse gas content than conventional fuels. Refiners are under fire for producing almost 15 percent of carbon emissions in the US. If electric cars become a real viable alternative, will the public abandon gasoline once and for all?
That could be the ultimate solution to the problem of oil.
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