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Chilly climate for oil refiners as U.S. demand dips

The Valero Refining Co.,   the nation’s largest refiner, has shut down  a number of refineries because U.S. demand for gasoline has so fallen sharply in the recession. Once the industry’s high flier, Valero has seen its stock price plummet 22 percent over the past 12 months.

Associated Press (2005)

The Valero Refining Co.,  the nation’s largest refiner, has shut down a number of refineries because U.S. demand for gasoline has so fallen sharply in the recession. Once the industry’s high flier, Valero has seen its stock price plummet 22 percent over the past 12 months.

Only a few years ago, a cry went up that the United States needed more oil refineries. The perceived shortage was so acute that President George W. Bush even offered disused military bases as sites for building them.

Not only did that never come to pass, but the reverse is now happening. The business of oil refining is mired in a deep crisis, with five refineries having shut down this year, including plants in Delaware, New Jersey, California and New Mexico.

Gasoline demand, which many analysts had long expected to keep rising for decades, is down sharply in the recession. And refiners are increasingly convinced that even after the economy recovers, demand will not grow much in coming years because of the rise of alternative fuel supplies and the advent of tougher efficiency standards for automobiles.

The recent closings signal the end of a period from roughly 2004 to 2008, when demand soared, refineries operated near capacity and profits swelled. For drivers, that meant gasoline prices at $3 or $4 a gallon, especially when hurricanes knocked out refining capacity on the Gulf Coast. For refiners, this gilded period turned out to have been an anomaly.

Plagued by boom-and-bust cycles of rapid expansion followed by sharp belt-tightening, refining companies have often struggled to operate at a profit. That is a contrast to the production side of the oil business, long a road to riches.

"Oil production creates wealth, but oil refining has often destroyed it," said Costanza Jacazio, an analyst at Barclays Capital in New York.

Even so, these are unusually harsh times for oil refiners. The recent drop in gasoline demand could result in more refineries being closed in the coming year.

"We have too much capacity," said Lynn Westfall, the chief economist at the Tesoro Corp., a midsize refiner, who estimated that the industry's capacity of 18 million barrels a day must be cut 5 to 8 percent. "We need refineries to be shut down."

Refineries, especially smaller ones, have been closing for many years. The number of refineries in the United States fell to about 150 in recent years from more than 300 in 1982. At the same time, the nation's refining capacity grew by about 13 percent, as companies expanded their most efficient refineries.

But the shutdowns are now coming so fast that the United States is losing capacity as refiners struggle to match their output to falling demand. Some energy experts have said that gasoline consumption most likely peaked in 2007, when it reached 9.7 million barrels a day, and will not rise to that level again.

Even as demand has dropped, gasoline is still relatively expensive because of high oil prices. Gasoline prices have dropped to an average of $2.58 a gallon, according to the motorist group AAA, with many analysts predicting further declines this winter.

Gasoline consumption fell 3.5 percent last year, the steepest decline since 1965, while diesel consumption fell 6.8 percent, the most in 28 years. Both are set to fall again this year.

Government mandates for ethanol, meanwhile, are expected to grow through 2022. Biofuel supplies, which were negligible a few years ago, are set to reach 15 billion gallons in 2012 and 36 billion gallons in 2022. As production grows, ethanol and other biofuels displace gasoline and diesel; at many gasoline pumps ethanol is now 10 percent of the blend, and the ethanol industry is pushing to raise the percentage.

The refining industry is also faced with a new political reality. Unlike the Bush administration, which offered support and incentives to petroleum producers, the goal of the Obama administration is to encourage alternative fuels and reduce the use of gasoline.

In a speech this month at the Los Angeles auto show, Robert Lutz, General Motors' vice chairman for marketing, said, "The automobile industry simply can no longer rely on oil to supply 98 percent of the world's automotive energy requirements."

That leaves refiners with difficult choices: cut costs and hope to survive the downturn; try to sell plants; or shut down unprofitable refineries. "The industry is on its collective knees right now," said Charles Drevna, president of the National Petrochemical and Refiners Association.

About 700,000 barrels a day of refining capacity have been idled or shut down in North America in the last year, according Aaron Brady, an oil expert at IHS Cambridge Energy Research Associates.

The industry is expanding elsewhere around the world, especially in Asia, where gasoline demand is expected to rise in the coming decades. Thanks to multibillion dollar projects in China, India and Saudi Arabia, the industry is expected to add 2 million barrels a day of refining capacity this year, even as global oil demand drops by around 1.7 million barrels a day, or about 2 percent, according to Barclays.

The Valero Energy Corp., the nation's largest refiner, announced this month that it had shut down its refinery in Delaware City, Del., which could process 210,000 barrels of oil a day. Once the industry's high flier, Valero, based in San Antonio, Texas, has seen its stock price plummet as a result of the economic downturn. The stock is down 22 percent this year, after a 69 percent drop in 2008.

"The golden age of refining — if it ever existed — didn't last very long," said Bill Day, a spokesman for Valero.

Two other refineries were shut down since October: Sunoco's Eagle Point plant, in Westville, N.J., and Western Refining's plant in Bloomfield, N.M., with a combined capacity of about 160,000 barrels a day. Refineries in California and Aruba, the latter operating primarily to supply the United States market, were also closed this year.

Chilly climate for oil refiners as U.S. demand dips 12/24/09 [Last modified: Thursday, December 24, 2009 7:56pm]
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