Yves here. As a layperson looking at the oil crunch, it’s frustrating to see that pretty much all commentary treats oil as fungible, when part of the reason that the Russian oil embargoes and self-sanctions are causing so much havoc is that different types of oil produce different mixes of refined products. As we’ve had to point out, Russia’s “Urals” crude is moderately heavy and so well suited to producing diesel and home heating oil; Europe’s former ready access to it is why many European passenger cars use diesel. And the other countries that produce heavier crudes that could be mixed with US/Saudi light sweet crudes to make diesel are also on our enemies list: Iran and Venezuela.
So while this article points out that absolute refinery capacity is tight due to reductions in the last two years plus the loss of Russian refiners, I wonder if the need for refineries to have downtime to adjust to a changed mix of oil inputs has made that problem worse.
By Irina Slav, a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice
- There appears to be no end in sight for the current fuel supply crisis, with summer demand set to spike while refineries run at an unsustainable rate.
- While refineries have the ability to bring more capacity online, investors are unwilling to get involved in long-term oil and gas projects.
- U.S. fuel exports have hit record highs and the banning of Russian oil imports by the European Union will only add to demand.
Last week, Bloomberg reported, citing anonymous sources, that the Biden administration was looking into the possibility of restarting idled refineries in order to boost fuel production and tame prices. Meanwhile, operating refineries are running at utilization rates of over 90 percent, which, according to industry insiders, is an unsustainable rate. And come hurricane season, if there is refinery damage, things could get really ugly with the fuel supply situation.
Welcome to the downstream nightmare of the energy world.
The United States has lost around 1 million bpd in refining capacity since 2020, according to a Reuters report that also cited one analyst, Paul Sankey, as saying this meant the country is in what is effectively a structural shortage of such capacity. Globally, refining capacity has shrunk by over 2 million bpd since 2020.
According to the International Energy Agency, this is not a problem at all. The IEA estimated that global refining capacity shed 730,000 bpd last year and that, this year, refinery runs would be about 1.3 million bpd lower globally than what they were in 2019. The reason that would be no problem for the IEA is that demand for oil is seen as 1.1 million bpd lower than what it was in 2019.
Not everyone is so calm, however, especially in the United States, where retail fuel prices are breaking records while refiners convert their refineries to biofuels production plants.
“It’s hard to see that refinery utilization can increase much,” Gary Simmons, chief commercial officer of Valero, told Reuters. “We’ve been at this 93% utilization; generally, you can’t sustain it for long periods of time.”
Interestingly enough, despite the imbalance in supply and demand, which has pushed the crack spreads to the highest in years, refiners do not seem to be planning new capacity additions. The reasons: time and investor sentiment.
“Investors do not want to see companies pouring money into organic oil and gas growth,” Jason Gabelman, director at Cowen, told Marketplace last month. In addition to this, building a new refinery is a lengthy and expensive endeavor that few refiners appear to believe is justified despite the record crack spreads. Also, investors have become more impatient and don’t want to wait for returns from projects such as new refineries.
At the same time, demand for refined products remains strong: U.S. fuel exports are running at record rates, a lot of them going to Europe, which, like the U.S., reduced its refining capacity over the last two years but now needs new sources of oil products after it embarked on an emergency course to cut its dependence on Russian oil and fuels.
Speaking of Russia, sanctions have resulted in a substantial reduction of refining capacity, with Reuters estimating as much as 30 percent idled, with some 1.2 million bpd in capacity likely to remain offline until the end of the year, according to JP Morgan.
Meanwhile, in Asia and the Middle East, refining capacity has been on the rise. In Asia, the new additions have topped 1 million bpd, according to a Bloomberg chart, while in the Middle East, new refining capacity since 2019 has reached about half a million barrels daily.
The balance of refining capacity, then, has not just changed but also shifted geographically. The U.S. two weeks ago exported 6 million bpd in refined petroleum products. After the EU approved an embargo on Russian crude and products, albeit “in principle” for now, chances are that demand for imports from the U.S. will rise further, straining U.S. refiners even more.
Then it will be time for hurricane season, and even if the Gulf Coast gets lucky this year, refinery closures in anticipation of storms making landfall are pretty much guaranteed, based on what we have seen in the past.
This does not bode well for fuel prices, which have become a major issue for governments on both sides of the Atlantic. There is a certain sense of irony in that one, although by no means the only, reason for the capacity imbalance is investors’ focus shift from oil and gas to alternative energy sources.
The way things look, refiners could build more refining capacity, but investors are unwilling to participate in the long-term growth of the oil industry, as Marketplace’s Andy Uhler put it. What this translates into is higher fuel prices for longer until demand begins to subside, which would probably happen at some higher price level.
In the immediate term, however, with driving season soon to be in full swing, the refining capacity situation will likely make a lot of lives harder. And while gasoline is in the headlines because of the millions of drivers who have to pay a lot more at the pump, the bigger problem remains diesel – the fuel that the freight industry depends on to bring goods from producers to consumers all over the world.
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the 3-2-1 crack spread, a shorthand for figuring out how much refining margins are.
the spot price for two barrels of gasoline, added to the spot price for one barrel of heating oil, and then subtract the spot price for three barrels of Texas crude oil.
this spread is 2.5+ times the historic range.
undeniable evidence of sanctions blowback and that the world has a refinery shortage.
https://www.energystockchannel.com/3-2-1-crack-spread/
I wouldn’t mind seeing whether anybody has done an analysis of how old these refineries are and what upgrades that they have received over the years. You would expect that older refineries would be more liable to breakdown when under pressure. So much of the infrastructure in the US is old that I would guess that this would also be true of all those refineries. And come to think about, what about the workforce for those refineries? What is the average age? Is their expertise retained? Has there been any moves to replace them with cheaper guys?
All the right questions. One can bet that given the choice energy companies prioritized share repurchases over maintenance cap-ex, growth cap-ex, replacement cap-ex all while continuing to cut staff and try an increase profit margins.
I can’t speak for all or even most, and only to limited examples in the midwest/great lakes. But many are pretty old. The pipeline networks in the area were commissioned in the 1950’s and the refineries are of the same vintage. Modernization and even upkeep is hit or miss. It seems partially dependent on how many times the facility gets bought/sold. But almost everything goes slow.
For example, I was involved (not via the refinery owner) in the response to the superior refinery fire in 2018. After the initial accident, everything else went as right as it could. The asphalt fire being extinguished the same day, for example, and the fact that it did not end up igniting other tanks limited damage. Aerial footage from the day shows that adjacent tanks were boiling off but they didn’t ignite. Even still, the repair/reconstruction is only about half complete at this point. I’ve been involved in portions of that effort too. The long time line is not because nobody’s in a hurry; just the opposite.
Link has a good animation of the event. I ended up arriving in Superior at about 10:00 pm that day and spent the next week in the immediate vicinity of the refinery.
https://www.wpr.org/valve-had-been-known-leak-documents-show-superior-oil-refinery-knew-about-equipment-issues-years
I agree. My experience at refining facilities is that many are 40+ years old. Many of the people who work there are also older, or they’re brand new to the industry. Just as important, many of the service companies are staffed with older people and have limited redundant equipment so that if you have an emergency at more than one plant you might not be able to handle them both at the same time.
The last new refinery in the US opened in 1977. That should give you an idea of the overall age of the industry, but refinery revamps and on-going maintenance mean that they are essentially getting rebuilt over time even if the site itself is old.
There is one refinery slated to be opened in the US in the next year or two (Davis, ND). It is designed specifically for oil coming out of the Bakken. It took over 7 years for that refinery to get its environmental permits approved.
Old infra, zero excess infra, welcome to the post-cold war west.
everything in the name of that wholesome stock buyback, because dividends are so last century.
And if you start asking awkward questions, you get economically excommunicated by their social media attack poodles.
Killing supply makes demand skyrocket. Makes gas and oil worth twice as much to the captive consumer and over-stimulates the industry like mad. But nobody wants to invest in the expansion of gas and oil, and for good reason. If expensive and-or alternative fuel makes demand fizzle the production of oil will crash because no profits for the producers. Which will in turn cause shortages and high demand all over again but no improvements in biofuels. So the government must be the investor in order to get off this merry-go-round. To change to biofuels as necessary. This is just a classic example. It really applies to the push to over-use fuel to keep the industry going, even in good times. The government needs to nationalize energy to stabilize everything. And ration fuel at reasonable prices.
Yep. Any semisensible government would long since have mandated investment toward new refineries/rebuilding the old, controlled shutdowns or idlings of currently operating plant, killed the ethanol subsidy that causes the West Coast summer changeovers IN the refineries, etc. – but, the Market! USA USA
Details from my post below:
Susan the other, IMOR:
As an aside, the situation of the “teapot” refineries shows attempts at government control, even in a command economy, do not have the expected consequences.
IMOR:
There are refinery sites which are pushing a century, but physical plant is replaced as new technology is developed and scheduled maintenance keeps them going.
See also
terry mcneely “My guess, new refineries arenʻt being built for a very simple reason: that investment will last 40-50 years.
In 20- years oil production will be plummeting.”
ian “Why on earth would anyone want to build a new refinery these days? Maybe it would be easier elsewhere, but here in CA, it would be endless environmental litigation.”
[The following is differentially based on knowledge, anecdote and IIRC and involves some ranting. Reader discretion is advised]
Yves:
Yes.
Also, to fully adjust you need to rebuild parts of the refinery, which is not going to happen. You will end up running less efficiently, with lower capacity.
The Rev Kev:
There are refinery sites which are pushing a century, but physical plant is replaced as new technology is developed and scheduled maintenance keeps them going. In North America the breakdown rate will probably not change much over the next few years. In particular, a large number of North American refineries are mid 80s to early 00s, so are not particularly old. Chinese “teapot” refineries, illegal Nigerian refineries, and the like are a different matter.
When refineries (or upgraders) are shut down for longer restarting them becomes more of a problem. This has been obvious in the attempts to restart the Venezuelan upgraders; wouldn’t be surprised if there would be issues with restarting Russian refineries, or American refineries under the “Biden administration … possibility of restarting idled refineries” idea.
As an aside, the situation of the “teapot” refineries shows attempts at government control, even in a command economy, do not have the expected consequences.
The workforce issue is interesting. On the one hand years of experience have been formalized in process. This is obviously good: because everyone does what works, individual mistakes are minimized and things don’t blow up. This is less obviously bad: new learning by “cheaper people” is unlikely, applying thought to an unusual situation when it’s needed becomes harder because you’re applying a checklist.
—
In the end, spending five years building a refinery that could run for fifty
You just can’t build a pop-up refinery.
“Welcome to the downstream nightmare of the energy world.”
It’s all supply and demand. Oil companies shut down refineries to decrease the supply of gasoline and diesel. The man-made shortages causes price increases.
New refineries aren’t going to be built because more refining capacity will only hurt prices and cause lower profits.
This is the same sort of price manipulation we saw with California electric prices. Shut down generation capacity and profit off the resulting price increases.
My guess, new refineries arenʻt being built for a very simple reason: that investment will last 40-50 years.
In 20- years oil production will be plummeting.
Why not a windfall profits tax on oil producers and refiners of say 75% or so that would be used to pay for new refinery additions and repairs?
Steve Keen has suggested that people familiarize themselves with the work of Simon Michaux, a Finland-based Associate Professor of Mineral Processing. Michaux makes the point that minerals have been declining in availability and quantity pretty much as predicted by the Limits to Growth Report from 1972.
From Michaux paper:
“Global reserves are not large enough to supply enough metals to build the renewable non-fossil fuels industrial system or satisfy long term demand in the current system. Mineral deposit discovery has been declining for many metals. The grade of processed ore for many of the industrial metals has been decreasing over time, resulting in declining mineral processing yield. This has the implication of the increase in mining energy consumption per unit of metal.
Mining of minerals is intimately dependent on fossil fuel based energy supply. Like all other industrial activities, without energy, mining does not happen. A case can be made that the window of viability for the fossil fuel energy supply ecosystem has been closing for 5 to 10 years. It becomes highly relevant then to examine how mining ecosystem interacts with the energy ecosystem. The IMF Metals Index and the Crude Oil Price Index correlates strongly. This suggests that the mining industrial operations to meet metal demand for the future are unlikely to go as planned.”
So a world shortage of fossil fuels means a shortage of minerals leading to a disruption in building a renewable non-fossil fuels industrial system. In other words a complete cluster @#$%
Physics, the real dismal science…
According to an article I saw on Bloomberg Canada yesterday, EVs are responsible for 1.5 million bpd oil demand avoidance, set to reach 2.5 million bpd by 2025. Oil demand from private transport has already peaked and the remaining growth comes from commercial transport and that peaks in 2026. I assume that latter growth is diesel demand. So are we also seeing that there is a strong decoupling of diesel and gasoline growth where gas is falling but diesel rising? So heavier stuff is where the growth is at. Also all those EV need a lot of electricity – primarily at night – that growth I would assume be taken up by natural gas. Seems like something has to give especially in Europe.
I just did a news interview on RT (Russia), and they are emphasizing America’s double standard in continuing to import Russian heavy oil, while telling Europe not to.
The Russian strategy is to drive a wedge between Europe and the United States by arguing that Europe is run by NATO, not by elected politicians — and NATO works for the US, not for Europe. (European politicians also work for the US when a contribution to their offshore bank accounts is brought into play.)
Interesting strategy, Professor.
While the US seems to be following a dual strategy of indirectly attacking Russia via Ukraine and poking China in the South China Sea and Taiwan, the Russians are deepening their alliance with China while driving a wedge between the US and Europe.
Hmmm, I wonder which strategy will prevail?
Actually, I agree with you and others who have said the uni-polar world of US dominance is over and we will soon settle into a multi-polar world. (If the idiots in D.C. don’t start a nuclear holocaust.)
Supply? Demand? My money is on price controls and rationing within a year. I see scant chance of governments beleaguered with (justifiably) infuriated electorates sticking to their free market principles. As near as I can tell, the whole principle free markets was tossed out the window four months ago, to no great mourning.
“As near as I can tell, the whole principle free markets was tossed out the window four decades ago, to no great mourning.”
There fixed that for ya.
Why on earth would anyone want to build a new refinery these days? Maybe it would be easier elsewhere, but here in CA, it would be endless environmental litigation.
“U.S. fuel exports have hit record highs and the banning of Russian oil imports by the European Union will only add to demand.”
But India is buying Russian oil and then re-selling it to the European Union. How is demand increased in that scenario? Even price may not increase substantially inasmuch as Russia is selling the oil at a discount to its “most favored nations”. This is why all the commentary treats oil as fungible. It’s not because they don’t know that diesel and gasoline come from different types of crude. Sure heavy and light sweet crude aren’t fungible. Every buyer of Russian crude before the Ukraine invasion is still looking for the same grade of crude right now. “Fungibility” isn’t one of their search terms. India will supply exactly what they’ve always been using. [Hopefully I don’t get awarded the dunce cap from Yves with this comment, but that’s the way I see it.]