Monday, July 27, 2009

Recession Causes Refinery Closures

One of the results of the ongoing economic recession is very low refinery utilization rates, and low operating margins. One recent source states that marginal refineries will shut down, especially those that are independent refineries with no oil production of their own.

That could very well happen, especially if crude prices rise as the U.S. dollar fluctuates in value, which it very well could do. The demand for products is not likely to increase soon, in fact, it will likely decrease as the end of the summer driving season nears. Diesel fuel consumption is not likely to increase because that is tied to overall economic activity, and despite (or because) of the Obama administration's intervention into the economy, there is no sign that diesel fuel demand will increase anytime soon.

California, the largest state economically as well as by population, is in intensive care mode even though last week a compromise budget was passed. The compromise did nothing to cure the economic problems, but merely postponed them for a few months. In fact, some local governments are threatening lawsuits against the State of California for not sending money to the local governments. This is a bit like four people about to eat lunch, with money enough for only three, then the biggest and strongest robs the weakest of his lunch money. There still is not enough money to go around, it is merely distributed differently. The impact on national fuel demand is due to the ripple effect from California's problems. Each state in the U.S. has some impact from California's fiscal irresponsibility, because California grows (perhaps grew is the correct word here) food crops and has three major ports (San Francisco, Los Angeles/Long Beach, and San Diego).

As to which refineries will close, traditionally the smallest in a competitive market are vulnerable, or those with the least efficient processing. As I wrote earlier, in California a refinery closure that was proposed drew the ire of a U.S. Senator and threats of anti-trust litigation. That refinery is now in bankruptcy proceedings. One must wonder if any other refinery must tolerate such treatment at the hands of Senators.

However, the above-referenced article states that Shell is considering shutting at least a part of a large refinery near Houston, the Deer Park complex. Shell Deer Park has a refinery and petrochemical complex.

At what point will the tax-and-spend and more-regulations-are-good forces realize that industry is the golden goose in America? It takes very little for massive refineries to choose to shut down and their tank farms converted into receiving terminals. Foreign refineries such as the new refinery in India are quite willing to refine crude oil and ship the products to the U.S. The loss in tax revenues to the local governments will be noticed. The improvement in air quality will not.

The looming cap-and-trade regulations, and additional burdens of ethanol-blended gasoline and bio-diesel will further erode refinery utilization, causing further shutdowns. Does the USA actually want to have the transportation infrastructure dependent on the vagaries of weather? That is exactly what is at stake with bio-fuels from corn, soy, and other crops. As one recent article states, "When the Bush administration and Congress required gasoline refiners to blend in 15 billion gallons of corn-based ethanol by 2015, they made the impossibly rosy assumption that American farmers would always enjoy good weather. But as every farmer knows, years with perfect growing conditions are uncommon and getting more rare.

In early April, Environmental Working Group Founder Ken Cook warned that the government’s food policy amounted to “hope for good weather.”

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