The controversy is raging in full swing: the dearth of new refineries in the US. Many are shocked to see the continued improve in oil prices despite the surge in domestic oil production. Could refineries be the missing element within the equation, they marvel. ‘Why not just build new refineries and scale down the value of oil,’ our readers continue to ask us. Sure, it’s a reality- no new refinery has been built in the US prior to now three a long time. The final refinery constructed in the US at Garyville, Louisiana was approach back in 1976. So, the query is reiterated as the point is so apparent: new refineries. But then, there are not any simple three causes, nor is the dimension only 4.
First though, let’s have a look at the prevailing price of oil. In accordance with a AAA gas gauge report, the nationwide common for a gallon of gasoline is $three.62 – more than 13 cents from the earlier week and 24 cents greater than a month ago. After the fall in May and June, gasoline costs have elevated progressively for the final seven weeks, including pain to the already pained shopper. Is that this because of dwindling oil reserves? Effectively, of late domestic oil production has elevated by fourteen p.c in the last 12 months. In accordance with government sources, the oil production in the country hit the highest ‘quarterly level’ in virtually a decade (for the first three months of this yr). And, US produces fifty five p.c of the oil consumed in the country, mainly as a consequence of production spikes in Texas and North Dakota.
Clearly there is oil, so shouldn’t the oil price decrease? In any case, the more the commodity, typically, lesser is the costs. Put it that way, the current oil costs do sound ominous. It isn’t as if increased demand has hiked the oil costs. On the contrary, demand for oil has been decreasing with gasoline efficient automobiles and ethanol blended gasoline. This July, crude oil demand in the U.S. dipped to its lowest in 4 years on the back of average economic growth within the nation, in line with the American Petroleum Institute. The demand for gasoline fell three.Eight p.c this July with consumption down 1.1 %. After the peak in 2007, demand for gasoline has been sluggish. That’s, despite increase in the worth of crude, demand for gasoline is at report low. So, the speculation does acquire force – are lack of refineries hampering the fall in the value of oil? North Dakota produces more than 600,000 barrel/month however has only one refinery in Mandan. An element of bafflement does linger to see the nation producing substantial oil and yet importing refined products.
There’s colossal gap in the realm of production and refining capacity within the country. The refineries are churning at full capacity which makes them profitable, but on the downside there is no room for mistake. They need to deal with variable demand on one hand and better prices of inputs on the other. Just lately, Sunoco Inc. introduced closure of its largest refinery resulting in fears of gas shortage and higher oil costs in the US. Fortuitously, a deal with the Carlyle Group saved the day for Sunoco Inc. and the oil industry. However, the problems within the refining sector are far from over. Two refineries owned by Sunoco Inc. did close in the final eight months, which means a lack of almost half the gasoline and different refined products in the East coast.
True, new applied sciences have elevated the home oil production. For once, though, the infrastructure in the US has didn’t meet up with the surging domestic oil production. Barges, rails and trucks, believe it or not, still transport crude. Naturally, the oil barely reaches the refineries and this mode of transport also makes oil dearer for the patron. How about pipelines? We all know that imported oil is costly. Still, the Marcus Hook refinery continued to import oil at $114 a barrel in 2011, even when the West Texas Intermediate crude traded decrease. Why? Lack of pipelines, once more. And with this paucity in pipelines, crude produced in the nation is not reaching the refineries. Of course, the much hyped Keystone XL pipeline would join Canada’s oil with refineries within the Gulf of Mexico and Houston, however that will take years.
Staying with refineries, the necessity for pipelines is more pronounced within the Gulf coast. The refineries within the Gulf coast contribute about forty five percent of the refining capacity, and 30 % whole crude oil production within the US. Of late, the imports have declined in the Gulf coast, due to drilling within the Eagle Ford Shale in Texas and Bakken shale in ND. Unsurprisingly, import of the more expensive mild candy Nigerian crude stood at one hundred fifty,000 b/d in January, the bottom since 1996. (For the corresponding interval, there’s decline within the import of Nigerian crude to the East coast too.) Yet, think about the figure with extra pipelines in the area. Yes, the crude from Eagle Ford from Texas has started to arrive in the Gulf coast. Nonetheless, the crude is candy gentle. A lot of the refineries within the Gulf Coast are more sophisticated, designed to course of heavy and extra bitter crude. As funding to refine the lighter sweet crude is costly, the one option for the refineries is to blend the completely different crudes. The irony.
In the meantime, woes of the refineries in the East coast proceed. Two have already closed, and the remainder of them are barely managing to scrap by way of. These refineries are dependent on imported crude as they don’t have simpler access to cheaper West Texas Intermediate crude. Hence, they continue to import the expensive Brent crude. There are plans to transport oil from North Dakota to the East coast by rail, however when?
Though a continuation of the import story, the scene is slightly different in the Midwest. The refineries listed below are enjoying greater earnings, credit score to generous provides from Canada and domestic oil. Imports from Canada reached 1.76 million barrels a day in the first quarter of 2012, a rise of almost 22 p.c from final year (Source: EIA). Unsurprisingly, Canada is the biggest supplier of crude to the US followed by Saudi Arabia.
Just lately the Port Arthur refinery underwent growth to nearly double its daily capacity. So, why do refineries develop relatively than build new ones? It is simpler because of the environmental laws. The obvious lack of logic in not having refineries does get answered when you are taking the surroundings underneath consideration. Refineries gobble up water, not to mention vast tracts of land, and contribute a great deal of CO2 to the air, as nicely. So, environmental regulation tends to be exhausting for anybody considering refineries. The EPA laws are additionally strict on the sulfur content Mild crude is simpler to process, has lower sulfur content so it is simpler to get the environmental nod. Heavy sour crude, on the other aspect, has extra sulfur and is tougher to process. Sunoco Inc. is said to have misplaced $ 1 billion in the last three years, making an attempt to improve in accordance with the stricter EPA regulation.
Will the image change? Everybody wants refineries, just is someone else’s yard. The new EPA regulation for brand 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 needs to drill “nearly 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 legal guidelines, no refinery goes to return up anytime quickly. The situation is precarious. The demand is not anticipated to rise anytime soon. EIA has lowered the forecast of oil consumption in 2012 and 2013.
Any destruction due to accidents (like the latest fires), weather conditions, and maintenance would have an effect on the availability with immediate impact. As an example, the recent fireplace in the Chevron refinery at Richmond, California disrupted virtually 16% of the supply in the area. Ample reserves, yet vulnerable to import fluctuations- which country would want to proceed in this place?
If the refineries aren’t taken care of, the dream of cheaper crude would continue to be a dream. That could be sad with the present domestic resources.
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