There was an extremely informative article in the April 9 edition of the Financial Times describing a precipitous decline in U.S. petroleum refining capacity and its implications for U.S. energy markets. Among the article’s take-aways:
- Half of the refining capacity on the U.S. East Coast is set to be shut down.
- Many refineries on the U.S. East Coast face ;very high costs associated with importing oil from countries e.g. Nigeria, Norway and Angola, resulting in negative margins for some refineries. While oil from domestic sources, e.g. Texas, would be far less expensive, there are no available pipelines. On the other end of the equation, refineries have suffered from weak consumption in the United States, a fact mirrored in Europe;
- While more than 3 million barrels of daily refinery capacity have closed in western countries in recent years, while refining capacity has increased by 4.2 million barrels per day, with an additional 1.8 million barrels per day expected this year;
- World demand has increased in recent years, however, buoyed primarily by rising demand in Brazil, India, China and Saudi Arabia;
- While U.S. crude production is at its highest level,. the U.S. market is now “really four markets when it comes to products,” with substantial exports from the Gulf of Mexico, home to 43% of U.S. refining capacity, a surplus of supplies in the inland regions of the United States, a west coast largely isolated from the rest of the country, and the East Cast increasingly relying on imported fuel;
- One of the most likely future incremental suppliers to the East Coast is India; however, longer supply chains could result in heightened price volatility.
This article could stimulate some good class discussion, including whether the U.S. should aggressively seek to expand pipelines between oil-rich domestic regions and East Coast refineries, as well as whether there any longer is any validity to the argument that U.S. environmental laws has interfered with the development of refinery facilities, resulting in increased prices to U.S. consumers.
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