June 04, 2007
Petroleum refining and comparative advantage
Some readers keep asking me, If U.S. refining capacity is such a big issue, why don't we just import more finished product?
From Friday's North Texas Star Telegram:
[N]o refinery has been built in the United States in three decades, only one is in the works, and oil companies are scaling back planned investments in new, expanded or modernized U.S. refineries rather than increasing them. Overseas, however-- where it's generally cheaper, faster and easier to build oil refineries-- a boom in construction is under way to meet the growing demand for gasoline in the United States and in big developing countries such as China and India. That means Americans increasingly will be filling their tanks with imported gasoline...
"We are outsourcing refining," said Severin Borenstein, an economist and energy expert at the University of California, Berkeley. "I think that this is primarily because of community resistance ... people don't want to live by refineries, but they still want the gasoline."
Last week the U.S. imported 1.6 million barrels per day of motor gasoline, a near-record quantity, and an order of magnitude bigger than the quantites that the U.S. imported thirty years ago. Yet as Robert Rapier correctly observes,
If gasoline imports hadn't been so strong (also something I have been predicting) then we could have actually seen a draw [last] week. If imports [last week had been at the previous] week's level-- which was itself pretty healthy-- we would have seen nearly a 1 million barrel draw on gasoline stocks. That would have likely set the market back on fire, and demonstrates just how dependent summer prices are on gasoline imports.
I've commented before that the seasonal in U.S. gasoline prices has become much more pronounced since the introduction of Phase II reformulated gasoline requirements in 2000. Another factor is that gasoline prices have to rise enough each summer to attract the necessary additional imports from abroad:
Historically, refineries had been located near the markets whose demand they serve, which makes perfect economic sense. However, a key comparative advantage of foreign refineries today may well be the fact that their construction is not subject to the U.S. system of regulatory delays and judicial challenges.
There are many factors that influence the total quantity of goods and services that the U.S. imports, not least of which is what is going on with U.S. borrowing and international capital markets. But we will certainly need to see some adjustments on the real side to reduce the trade deficit. Finding places where we can make those adjustments could be a big challenge.
Keeping the value-added from petroleum refining within U.S. borders strikes me as one very logical place we could try to do that.
Posted by James Hamilton at June 4, 2007 12:06 PMdigg this | reddit
Are we committing slow motion economic suicide by way of our court system?
"They think they can live in a world of only Malibu and East Hampton—with no Trentons or Detroits."
Posted by: Robert Schwartz at June 4, 2007 02:00 PM
It's actually interesting just how much gasoline comes into parts of the U.S. from other countries. U.S. Army Corps of Engineers records shipments via waterways, and in the northeast (where most of the petroleum products arrive by barge rather than pipeline), Canada supplies about 1/3 and other foreign countries about 40%. That's not supplying at the margin, that *is* the supply.
EIA records what countries are shipping into PADD I, and most comes from Europe, roughly in this order: U.K., Netherlands, France, Russia, Italy, and Latvia. At least part of that list must have as much regulatory burdens as the U.S. Other than Europe, the Virgin Islands and Venezuela are the big exporters of refined petroleum products.
Posted by: mlmitton at June 4, 2007 02:40 PM
Exxon Mobil said they won't build a new refinery in the U.S. because they expect North American fuel consumption to peak by 2025. However, whether this peak prediction is true will depend on how much America uses biofuels.
In the meantime, Exxon and others will build refineries in the developing world because that is where demand is expected to increase over a long enough time period to be economical.
Posted by: Charlie Stromeyer at June 4, 2007 03:53 PM
See also slide 28 of this little EIA slideshow. US and European distillation capacity are projected to remain closely matched with demand and Asia/Pacific demand is projected to outpace supply. Excess capacity is projected only for the Middle East.
The unique comparative advantage of the Middle East versus other regions?
Crude supply, not regulation.
Posted by: wcw at June 4, 2007 04:31 PM
Thanks, I think I'm one of those that kept asking.
"Historically, refineries had been located near the markets whose demand they serve, which makes perfect economic sense."
The textbook "oil refinery" shows a number of products. I wonder how many of those outputs find a market in a place like Wilmington and how many are a burden?
One beauty of shipping gasoline must that you do not ship "waste products" along with it.
So anyway, I'm thinking that you might be able to shift the high value fraction to its market ... and hopefully you don't flare off to many other things in the unrestricted environments overseas.
Posted by: odograph at June 4, 2007 05:43 PM
I'm a late-comer to this series of threads, but wonder how many folks so enthusiastic to roll back our (quite modest) environmental regulations in this case have ever driven through Beaumont with the windows open. (I have).
Posted by: M1EK at June 4, 2007 06:29 PM
Why should it be more economical to have the refinery near the point of consumption? The aggregate product of the refining is no more voluminous than the crude from which it comes. Perhaps gasoline is a bit trickier to ship because of its volatility, but I wouldn't think this would be a huge economic swing factor. Construction costs of the refinery would be a big factor; these should follow local labor costs and availability of expertise.
Of course, there could still be valid security or balance-of-trade issues for local refining even if there is no pure cost advantage.
Posted by: david foster at June 4, 2007 07:47 PM
The great bulk of change in gas prices, and their seasonality, are explained by oil price movements:
Building more refineries in the US is not going to do all that much unless OPEC is willing/able to scrape up a little more oil.
The legal/NIMBY issues are a bit of a red herring I think - refineries have been closing due to lousy margins, although total refinery capacity has been rising (due to capacity expansion at larger more profitable refineries).
Posted by: Stuart Staniford at June 4, 2007 08:58 PM
Keep in mind one thing: Europe has an excess of gasoline capacity and a shortage of diesel, because their governments have forced drivers to drive diesel cars through tax and regulatory policies.
Refiners do not have an ability to make more diesel while making less gasoline. If you want more diesel, you make more gasoline.
So what do European refiners do? They put gasoline on a barge and ship it to New Jersey, and they take diesel back over.
So a certain portion of those gasoline imports are not market driven. They are driven by government fiat, and worse than that, they're not even our government's fiat!
And that is different than driving a Fiat, although Europeans do that too!
Posted by: Buzzcut at June 5, 2007 08:32 AM
david foster: Actually, one 42 gallon barrel of crude oil gets refined to about 45 gallons of refined product, of which about 19.5 would be gasoline. (Exact values depend on product mix, but that's typical.) Another 10 gallons for diesel, and 4 for jet fuel. That is, crude oil gets refined into products that are less dense than oil itself, so volume does in fact decrease.
wcw: The product mix from refining a barrel of oil isn't fixed. They can go through additional steps (e.g., cracking or alkylation) to turn heavy oils into lighter fuels like gasoline, or gases into light fuels. So depending on profitability, refiners can reduce the amount of, relatively speaking, "waste products" that are less profitable. If Wilmington has too much of low-profitability products, they can turn some of it into gasoline if need be.
Posted by: mlmitton at June 5, 2007 09:48 AM
How do these gasoline imports work given the patchwork-quilt of different gasoline types that you complained about two years ago:
You wrote, "The above map shows the nature of the resulting proliferation of fuel standards. It indicates that you could drive through 7 contiguous counties in Arizona, California, and Nevada, and be required by law to put a different formulation of regular gasoline in your vehicle in each one."
What do overseas refiners do when faced with such variations? Are there guys in Yemen going, OK, now let's make 200 gallons for Hicksville, Ohio, then set up for Beaver Dam, Wisconsin?
Posted by: Hal at June 5, 2007 10:19 AM
"Historically, refineries had been located near the markets whose demand they serve"
Beaumont, TX is a good example to the contrary, it was built due to its close proximity to Spindle top.
(And yes i have had the unpleasant experience of driving by with the windows down)
Posted by: cb at June 5, 2007 12:19 PM
If Wilmington has too much of low-profitability products, they can turn some of it into gasoline if need be.
They can do that if they throw capital at it. But it takes time and a profitable refining environment. The definition of a profitable refining environment has to include current and possible future regulatory and tax regimes.
Rush Limbaugh gives odds of 80% that Hillary! is our next president. This is the same man who didn't even think that she was going to run for senator, and who obviously isn't very fond of her. What does the prospect of having a person who is so blatantly anti-refiner (who has talked about "taking their profits"), be in such a position of power do to the refining environment? Refiners are risk averse due to hard won experience.
"The smartest woman in America" shouldn't talk like that.
Posted by: Buzzcut at June 5, 2007 01:23 PM
Good question, Hal (as always). I wasn't sure, so I asked Robert Rapier, who points out that increasingly what we observe is importation of blending components, which are included in the figures I cite for imported motor gasoline, and from which the final product is then blended in the U.S. to satisfy particular markets.
Posted by: JDH at June 5, 2007 01:43 PM
Blending components? Gosh and the paint mixing machine metaphor took such a beating here ;-)
Posted by: odograph at June 5, 2007 05:36 PM
kindly assist with data on cost components/refinery cost structure of topping plant,cracking refinery & a hydrocracker. what is the average cost for refining a barrel of crude.
Posted by: Komolafe, G. O. at July 30, 2007 09:48 AM