Even by the standards of a deep-cyclical industry, the "golden age" of oil refining has proved remarkably brief, lasting no more than three years, before giving way to a new dark age. Particularly in the United States, refiners have returned to the state of chronic unprofitability that plagued the industry before 2005. U.S. refiners now have too much capacity and produce the wrong products (gasoline) in a fuel economy increasingly dominated by ethanol and diesel. Capacity cuts of as much as 0.5-1.0 million bpd (equivalent to 4-8 average refineries) and expensive investment to reconfigure the system to increase the diesel yield seem inevitable. EVAPORATING PROFIT MARGINS In May 2007, U.S. refiners paid an average of about $64 a barrel to acquire high quality West Texas Intermediate (WTI) crude (less for other grades) and sold gasoline for $97 per barrel - a margin of $33 per barrel or 52 percent. By November 2008, U.S. refiners were paying $62 to acquire WTI but selling gasoline at a loss for just $52 - a negative margin of $10 or 16 percent. Other outputs are still profitable (notably diesel and heating oil) and many refineries will have acquired lower-quality crudes for less than the WTI price. The overall gross margin was still (just) positive.
Even by the standards of a deep-cyclical industry, the "golden age" of oil refining has proved remarkably brief, lasting no more than three years, before giving way to a new dark age.
Particularly in the United States, refiners have returned to the state of chronic unprofitability that plagued the industry before 2005.
U.S. refiners now have too much capacity and produce the wrong products (gasoline) in a fuel economy increasingly dominated by ethanol and diesel. Capacity cuts of as much as 0.5-1.0 million bpd (equivalent to 4-8 average refineries) and expensive investment to reconfigure the system to increase the diesel yield seem inevitable.
EVAPORATING PROFIT MARGINS
In May 2007, U.S. refiners paid an average of about $64 a barrel to acquire high quality West Texas Intermediate (WTI) crude (less for other grades) and sold gasoline for $97 per barrel - a margin of $33 per barrel or 52 percent.
By November 2008, U.S. refiners were paying $62 to acquire WTI but selling gasoline at a loss for just $52 - a negative margin of $10 or 16 percent.
Other outputs are still profitable (notably diesel and heating oil) and many refineries will have acquired lower-quality crudes for less than the WTI price. The overall gross margin was still (just) positive.
DEMAND DESTRUCTION Demand for gasoline and other refined products has been falling for more than a year, initially in response to high prices and now as a result of a weakening economy, leaving refiners with a huge overhang of unused capacity. The total volume of refined products supplied to the domestic market averaged just 19.2 million barrels per day (bpd) in the four weeks ending Nov. 21, down 1.7 million bpd (8 percent) from 20.9 million bpd in the same period last year. The volume of motor gasoline supplied (9.0 million bpd) was down 300,000 bpd (3.3 percent) compared with last year (9.3 million bpd).
Demand for gasoline and other refined products has been falling for more than a year, initially in response to high prices and now as a result of a weakening economy, leaving refiners with a huge overhang of unused capacity.
The total volume of refined products supplied to the domestic market averaged just 19.2 million barrels per day (bpd) in the four weeks ending Nov. 21, down 1.7 million bpd (8 percent) from 20.9 million bpd in the same period last year. The volume of motor gasoline supplied (9.0 million bpd) was down 300,000 bpd (3.3 percent) compared with last year (9.3 million bpd).
