Why is Oil Refinery Utilization Down?

Each Wednesday, the EIA (Energy Information Administration) releases the latest stats on the petroleum industry. And each week, the market reacts to these numbers. This week was no different.

On Wednesday, the market seemed to be keying on the 3.5 million barrel increase in gasoline stocks -- more than double what analysts expected. July gasoline prices responded by falling around 1%, but the more interesting stat was the one concerning gasoline refining. Refinery utilization, which normally hovers in the 95% range this time of year, is currently just under 90%. In fact, it's at the lowest level for early summer in 15 years. Lower even than 2006, when the refiners were still trying to recover from Hurricane Katrina.

What the heck?

There is plenty of oil to refine, with crude oil inventories up. Demand is certainly healthy (or ridiculous, depending on your point of view) with gasoline inventories at a lower than average level, and actual measured demand tracking a little higher than last year. The financial incentive is there with refiners seeing (very) high margins due to high gasoline prices (we know this from the crack spread). You'd think they'd be pumping as much refined gas out as possible. After all, it’s literally printing money to do so.

So … why aren't they?

Well, maybe they are. As the EIA puts it:

With gasoline refining margins (the difference between the spot price of gasoline and the cost of crude oil) at very high levels, refiners have a strong economic incentive to run their units at the highest possible rates, suggesting that unplanned refinery outages and extended maintenance are the key drivers of current utilization patterns.

American refineries are just plain old. A new refinery hasn't come on line in about 30 years. Added to that is the increased complexity in the process – refiners are increasingly relying on sourer crude, but have to produce product to ever-stricter environmental standards. And, of course, refineries are complicated places. All those pipes and tubes and silos aren't there just to make a movie set for a Schwarzenegger movie. A breakdown in one small area can quickly affect the rest of the operation, and maintenance is more important and more complex than ever.

One measure of how complex the refining situation is? The oil industry blames liberals for the refinery shortage, saying that excessive regulations and good, old-fashioned NIMBY syndrome makes it impossible to construct new refineries. Meanwhile, liberals blame the oil industry, claiming that they’re intentionally restricting refinery capacity to drive up profits. You can’t win.

Here’s another idea that’s floating around: Maybe it's ethanol?

As the world looks towards alternative fuels and away from oil, refiners are stuck in the middle. There's a need for their product today, but what about tomorrow? Refiners aren't going to invest in more capacity while the world looks elsewhere for its fuel. And a tight supply supports high gasoline prices, making those very alternative fuels look even more feasible.

Oh, what a tangled web we weave.

Head to the Prius dealership, honey: high gasoline prices may in fact be here to stay.

Links For More Research:

This Week In Petroleum EIA Released June 6, 2007

Rise in petrol inventories damps prices Financial Times June 6, 2007 11:34

American refiners reluctant to invest Reuters June 6, 2007

Comments

[Tom B]

Refineries are dirty and nasty. We should be transitioning to wind and solar and maybe some nuclear much faster than we are currently. What I don't get are the NIMBY's (Ted Kennedy included, I am sorry to say) who get worked up about reasonably attractive Wind farms 5 miles out to sea when. New England currently suffers from a number of nasty, dirty coal plants.

[CharliePeters]

Does corn ethanol fuel policy increase oil use and profit?

Clean Air Performance Professionals

[CharliePeters]

How about improving the system we have?

Ask for a fuel ethanol waiver allowed in the 2005 energy bill

Fuel ethanol uses lots of water

Audit "Smog Check" to fix the fault in more of the failed cars

Chief Sherry Mehl, DCA/BAR, has never found out if what is broken on a Smog Check failed car gets fixed, never

Improving Smog Check and fuel policy can cut car impact in half in 1 year and save money

About $20 billion in savings in first year

I'm confused about promoting products from offshore rather than improving our system

Clean Air Performance Professionals