Refiners may see decreased demand due to legislation

Refining margins in the US are likely to shrink in coming years because stricter fuel economy standards and rising mandates for blending ethanol and other biofuels will reduce gasoline demand, Deloitte, LLP said in a recent study.

Roger Ihne, a principal with Deloitte in Houston, wrote a study entitled “A Tsunami of Change Bearing Down on the Refining Industry.”

“Over 15-20 years, we can expect to see a reduction in gasoline demand,” Ihne said.

He emphasized that he was not projecting “the demise of the refining industry.” A lot of uncertainty exists while refiners await the outcome of proposed legislation about stricter fuel economy standards and renewable fuels mandates.

Climate change legislation also could add costs because refiners are expected to have to invest in ways to reduce greenhouse gas emissions.

“In the short run, refiners can reduce throughput or shut down less efficient units,” Ihne said. “Over the long haul, though, it’s hard to justify keeping a refinery operating while selling less output at a time when profit margins are declining and costly upgrades are required.”

He expects refineries along the Gulf Coast to be heavily hit by shrinking profit margins.

“The golden age of refining ended last year when…the economy sank into recession,” he said. “It won’t be back any time soon.” He said the age ended a 4-year run of good refining margins. “A lot of the assumptions refiners had just 2 years ago are likely to be turned on their head.”

Ihne compares the current scenario that refiners are facing to the shakeout that followed the oil price shock in the late 1970s.

“The average refinery utilization rate dropped in the US to 84% to 1979, a little above where it is now,” Ihne said. “It then fell to less than 80%, where it stayed until 1986. Over the next 2 decades, the number of US refineries was halved from 319 in 1980 to 149 in 2000.”

The US Energy Information Administration has forecast the utilization rate for US refining will slide to 78.5 percent in 2010 as a result of reduced demand. The last time utilization rates were that low was 1985. EIA expects gasoline demand will decline by 13 percent by 2030.

Valero Energy announced recently that has begun permanently shutting down its refinery in Delaware City, Delaware that had a capacity of processing 210,000 barrels per day of crude oil.  Also, Valero closed its 235,000 barrel per day refinery in Aruba in August.  Valero tried but could not find a buyer for either plant. 

Consumer must understand that a barrel of crude oil is not worth much until it is refined.  However, once refined it provides consumers with a myriad of products that makes our daily lives very comfortable.

Alex Mills is president of the Texas Alliance of Energy Producers.  The opinions expressed are solely of the author.