US Refining Capacity: A few statistics to ponder
Category: Oil & Gas...
Posted Tuesday, April 26, 2005 at 09:10 AM [GMT-6]

Yesterday's announcement of Valero Energy's acquisition of Premcor, Inc., along with record high gasoline prices, has focused media (and investor) attention on the refining industry. The industry was even brought to the forefront in yesterday's meeting between President Bush and Saudi Crown Prince Abdullah at the Texas White House, where a Saudi spokesman pointed out that even if Saudi Arabia increased its oil production, the lack of refining capacity would limit the impact of that move on gasoline prices.

Today's Wall Street Journal analyzes the Valero acquisition and provides some interesting background regarding the refining industry as a whole. The numbers help to explain the elevated gasoline prices, at least as far as the supply side of the equation is concerned. Here's a selection:

• The number of refineries has declined to 149 today from 325 in 1981


• No new refineries have been built in the US since 1976


• Capacity for refining crude has fallen 10% to 16.8 million barrels a day from 18.6 million barrels in 1981

This paints a rather glum picture for the industry, and for gasoline-thirsty consumers. But there is a silver lining, however thin.

• Even though capacity is down 10% since 1981, refinery output is up 25% over the same period, indicating that the industry is capitalizing on technology to better use existing capacity.


• Valero itself has added 380,000 barrels a day to existing refineries since 1996, via plant expansions and improved technologies.

Unfortunately, the country's appetite for energy is growing much faster than the measly 1% annual refining capacity growth.

A couple of implications to consider:

1. Specific to Valero, whose return to shareholders over the past five years has been tops in the S&P 500...can it continue in its strategy of focusing on heavy/sour crude* for its refining feedstock, thereby enjoying the higher margins that come from buying that lower-priced oil? Some of Exxon's Valero's competitors (notably, ExxonMobil) don't think it's a viable long-term strategy, as supplies of lower-quality crude will decrease over time.


2. In terms of the refining industry as a whole, will Congress ever address the mountain of regulatory and environmental restrictions that has stopped refinery construction dead in its tracks, and led to the closing of many existing plants?

*"Heavy crude" is oil that has a low specific gravity; that is, it's quite thick. Some heavy crudes are not even liquid at room temperatures. Sour crude contains a relatively high percentage of contaminents like sulfur. Both heavy and sour crudes pose special challenges throughout the production, transportation and processing chain.

Technorati tag: Refining Capacity | Valero Energy