…in the long term, what the industry has affected is not increased security via Canadian oil to the gulf coast, but a concentration of the nation’s refining capacity in the heart of the nation’s hurricane corridor. The lessons of 2005 have clearly not been heeded.
Pennsylvania labor activists marched on Capitol Hill yesterday in protest against the shutdown of three refineries in the state. Politicians from both sides supported them in their call to stem the job losses and address the imminent threat to the nation’s energy security that the loss of gasoline production in the east coast now poses.
The refining companies (Sunoco and ConocoPhillips) were quick to respond with the lame retort that some of these labor unions and politicians were supportive of failed cap-and-trade legislation that would have killed the east coast refining industry if it had been successful. What the actual impact of the failed cap-and-trade legislation would have been on the refining industry is debatable, what the refiners actually did was close ranks with their competitors by failing to mention the root cause of the failure of east coast refining. The increasing concentration of the nation’s refining capacity in the US Gulf Coast.
It is an overt strategy and is significantly based on the expected riches of processing low quality tar sands crude that would be delivered to the gulf coast by the Keystone XL pipeline.
A new refinery has not been built in America since 1976. However, through expansions and upgrades refining capacity in the gulf coast has grown over 1 million barrels per day since 2000 and is set to grow a further 325,000 b/d when the Motiva (Shell and Saudi Aramco) Port Arthur refinery commissions its latest expansion later this year.
Many of these expansions, including Motiva’s as well as those by Valero, Marathon and Total, have not just increased capacity but have been designed to enable these refineries to process greater quantities of heavy sour oil such as that derived from Canada’s tar sands. While heavy oil has always been delivered to the gulf coast from countries such as Venezuela, Mexico, Saudi Arabia and Kuwait, the timing of some of these expansions, and in some cases the stated intention, is to prepare for increasing quantities of Canadian tar sands oil that would be delivered by the Keystone XL pipeline.
The gulf coast refiners will do well out of this strategy for a number of reasons. Heavy sour oil is cheap because its low quality requires special equipment and not all refineries have this equipment. Therefore its market is limited putting the refiners at a market advantage. This is especially so as Canadian production has been booming due to rising tar sands production. Investing in that equipment is expensive but has been cushioned by favorable tax treatments that enable accelerated write offs and amount to billions of dollars in subsidy from the American tax payer.
However, gasoline prices are set by the most expensive source in the market’s pool of crude oil sources and therefore heavy oil refiners are making hefty profits out of the heavy oil discount.
But east coast refineries do not have the pipeline connections to western Canadian oil, and have historically not had access to the Latin American heavy crudes, so they did not invest in the heavy oil processing equipment. They were stuck relying on expensive light oil imports which squeezed their profit margins and led to their demise.
Meanwhile, certain gulf coast refiners have been tightening the screws further. Valero, with six major refineries on the gulf coast, many of which have significant heavy oil capacity, has been investing in European refineries with a view to exploiting the gap between diesel and gasoline prices in the Atlantic Basin (see graphic below). That means selling diesel into the European market while selling surplus (read cheap) European gasoline into the U.S. east coast market. A barnstormer of a profit making scheme for Valero; a final nail in the coffin of east coast refiners.
The result is great for the Canadian oil industry (if it gets its pipeline), great for gulf coast refiners, but has been devastating to east coast refiners. It is also quite detrimental to overall U.S. energy security.
The capacity to move gasoline and diesel from the mid-west and gulf coast refineries to the east coast will come, although will probably not come in sufficient quantity this year to prevent a painful price spike on the east coast this summer. But in the long term, what the industry has affected is not increased security via Canadian oil to the gulf coast, but a concentration of the nation’s refining capacity in the heart of the nation’s hurricane corridor. The lessons of 2005 have clearly not been heeded.
In the end, the profit maximization maneuvers of the oil industry will never truly serve the nation’s energy security interests. The U.S. will never be able to insulate itself from the vagaries of the global oil market. That politicians and the public continue to swallow the industry’s rhetoric on energy security is a sad state of affairs precipitated by multi-million dollar advertising campaigns and a bought-and-paid-for Congress.
A price on carbon may serve us better by encouraging efficiency and diversification away from oil. Moving the oil pieces around the board, within the United States, North America, or around the world, simply maintains the status quo, and the U.S. is as vulnerable as ever to the global oil hegemony.
This is a very biased article.
The USGC (US Gulf Coast) refineries expansion has been going on since 2000 and the conversion of a lot of these refineries from processing light sweet crude to heavy sour crudes was planned and done before the Canadian Tar sands oil and the pipeline was even an option.
The reason the USGC refineries expanded, modified their processing units to handle heavy sour crude was the decline of the supplies of light sweet crudes and the increased competition for the same types of crudes and the resulting higher costs. At that same time the increased supplies of heavy crude oil from ME and Countries such as Venezuela played the key factor into those conversions from being able to process light crude to that of being able to process the heavy crudes which were lot cheaper and were sold at great discounts to the light sweet crudes.
What the article fails to mention is that several European refiners have recently shut down their refineries including PetroPlus.
As to the subject of no new refinery built in the USA, who is responsible? It hasnt been because of companies not wanting to build new refineries but because of the slow process of getting permits and a whole set of regulatory requirements and if a permit is issued , the lawsuits filed by different groups to prevent a refinery from being built.
The refineries on the East Coast that have been shut down have been shut down because they are out dated and uneconomical to operate because of efficiency and the need for large amounts of $$$$ to upgrade them, sometimes in excess of 600,000,000.00+
for each refinery. The owners of those refineries have tried to sell them for a while and have been unable to, why? not that no one would want to buy a refinery but what kind of refinery? what would the costs be? and the buyers would have to invest a huge amount to upgrade the refinery.
All the political rhetoric aside, if the gov wants the refineries to be open, why not give them loans? to upgrade the refineries to be able to process heavy crude? OK approve the Canadian pipeline and let them bring that oil to these refineries? would that be a realistic solution? to save the jobs and keep the price of petroleum products in that area not to spike?
Tony you are missing the entire point. Which is, no matter how you point the figures in your comment, it is in the oil industry’s favor to limit its refining capacity. As they control the supply, they have even greater control of the price.
Ultimately this is not about the government wanting the refineries open. The dog and pony show has been going on for years, we have all been used for a long time and not even known it.
The hearings on capitol hill after the price spikes and record profits after Katrina was a prime example. The American people were outraged, so the government brought its pony out and paraded it across the stage. We were all made to believe that they were serious about getting to the bottom of it, but that was in fact far from the truth.
The committee leaders for that fact finding event were paid over 1.5 million from the oil and gas industries. How could we expect them to actually get to the bottom of the issue when they were paid not to?
On top of that, non of the oil industry executives were sworn in for their testimony. Several senators who were on hand for the event have publicly stated that it was a media event designed to make people think that the government was actually concerned about the price gouging and record profits. When in fact, they were not.
“What about the greatest threat to all of us? Wall St’s continued greed and avarice. They have manipulated oil up to $100 a barrel. This is an enormous threat to the world’s economy! If you don’t know it; listen up! Oil refineries all over the world are shutting down! Refineries in Hawaii, St Croix, Houston, Philly, Delaware, other places in the US, and Europe are shutting down! They are shutting down for three reasons (1) The price of oil is too high. (Thanks speculators on Wall St!) (2) There is a glut of oil and distillates and no place left to store it. Some refineries are turning into oil storage facilities. They can make more money from renting tanks to banks and hedge funds than they can make by producing product. (3) Due to the European oil embargo on Iran, Iran is selling oil at a heavily discounted rate to Asian refineries who will sell refined products to US cheaper than American refineries can make them. Bottom line; WE ARE SO SCREWED!!! Repeal the Commodities Modernization Act of 2000 and the Financial Modernization Act of 1999 and get speculators out of the Commodities markets!
Four years ago most investment banks were on the brink of extinction. Lehman Bros, Bear Stearns and 427 other banks went belly up. Banks that did survive received bailout and Tarp money from the federal government. The banks took our taxpayer money and invested in commodities and in the currency market. By January 2008 the oil market had hit bottom; oil was selling for $34 a barrel. So the banks and hedge funds invested in oil, betting that it would go up. After all, they had been previously successful in driving up the price to $140 dollars a barrel. They began hoarding oil, storing it in tank farms and on supertankers.
Then the bankers hired an army of oil traders to bid the price of oil up. Even though world consumption was down, they were successful at pumping oil up again with the resurrection of the big lie of “peak oil” and a few geopolitical crises’.
Drilling will do nothing to the price of oil. Opening the reserves will do nothing to the price of oil. The present price of oil has nothing to do with supply and demand (there is a glut of oil and no place to store it.) Instead of the price of oil being determined by supply and demand, the oil and currency traders now control the price of oil. These American and international bankers didn’t believe that the Obama administration would be successful combating the crisis that these very banks created. As the deficit grew and the treasury printed more money to bail out the banks, their traders and analysts declared the Obama administration dead on arrival when it came to the economy. They bet that the US dollar would lose its value. The US dollar has lost between 25-30% in the last four years. They bid it down and they made lots! Their cynical efforts to make a buck impoverished all of us by devaluing our currency. When your currency becomes devalued, the cost of everything goes up, especially oil and other commodities.
The banks scored twice; first by betting that oil would go up, then shorting the greenback, insuring that oil would go up. Don’t forget, we loaned the banks the money to do this, and for years those banks have made record profits.
Two years ago there was still a lot of idle money around that was frightened of the stock market, and the insolvency of banks. That money was put into the commodity markets and fueled the rise of the price of commodities world wide. It’s been a good couple of years for Goldman Sachs, J P Morgan, and their commodity and currency trading subsidiaries. A bright guy who ran an oil trading subsidiary for Citi Bank made 100 million as compensation. Their hoarding practices have started to be emulated by other countries; we now see China, The US, and others building vast oil storage facilities to take advantage of climbing oil prices. OPEC, big oil and the bank’s speculative efforts have and will cost American consumers billions.
Then there is the continued greed of oil producers. With the price so high, think of the money to be made! Problem is, there is no place to store it anymore and everyone continues to pump it out of the ground. And world consumption continues to be low.
Those of us who heat our homes, drive our cars, and use oil products in a myriad of ways, are paying way more than we should. And we have been for some time. Bernie Madoff ripped off his clients to the tune of 50 billion dollars, a monumental theft. So what do you call this oil market that has taken 50 times that amount? We have paid $2.5 trillion dollars more than we should! The irony of all of this is that we the taxpayers provided the seed money for this, the greatest rip off in history.
All of this hoarding and manipulation needs to end. Why aren’t the Justice Department and state Attorney Generals applying the RICO act against these criminals? Why haven’t we repealed the Commodity Futures Modernization Act of 2000 and The Financial Services Modernization Act of 1999?
It is important to know that all of the Keystone oil is destined for China, not our refineries. I think that we should stop it from crossing the US and the folks in BC will stop it also. They can still ship it to Canadian East Coast ports with existing pipelines.
While I agree with Frank’s comment that it is to the advantage of the oil companies to limit capacity to keep prices up, there have been no new refineries built in the US due to environmentalist SUING them out of existance!!!
With the money potential in refining there would be new companies building them if not for this and gubmint regulations raising the bar to entry.
Speculation drives the prices of oil (aka gas) at the pumps. Wall Street manipulates the speculation as it sees fit, drawing in insane profits to those investors wise enough to take advantage. Gordon Gecko would be madly in love with the leaders of Iran today.
Ultimately, alternative fuel solutions are the answer. But right now, oil (aka gas) is like crack. And there are a lot of ‘crack’ heads out there that need the stuff and will not give it up. It is but a very few in the top tax bracket that are profiting to the point they can laugh at the price of oil (aka gas) these days.
I feel it’s a catch 22. Drill baby drill for the ‘crack’ heads, or out with the old and in with the new . . cold turkey. Either way, someone is going to financially get hurt.
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