Down with the evil Gas lords. (yes, i am brave enough to post another from myspace)

[Ted Striker]

ZOMG free market economy is teh l33t!!! Except when I have to pay an extra few dollars at the gas pump even though it's poor people who could benefit from subsidized energy who actually get hurt from it! But it's great for the Texas economy where all the oil pimpz are all located!

[Kaak]

edit: damn...maybe i should read more good

[Spiffor]

Originally posted by JohnT
If you go out drinking one night and spend .1% of your yearly income, do you regret it the next morning?

Gah! There's no way in hell I spend a third of a daily income in drinks for an evening, unless something warrants it.

[Jon Miller]

Originally posted by Kaak
KH, jon - What do you guys do???

We are physics grad students...

I think KH does fine financially.

For a couple of years there, I was spending 50% more than I made though.

JM

[Kaak]

maybe all that hard work will pay off in the end

[Jon Miller]

academic postdocs don't pay that well (40k)... lab postdocs pay better (60k)

medical/industrial pays pretty good (starts as high as 100k)

JM

[Jon Miller]

even with the three years of eating out too much (Every day, and not fast food), drinking too much (bar 3ish times most weeks), and spending too much on toys (paintball guns..)

I still owe a similiar ammount as some of my class mates did at the end of undergrad

JM

[KrazyHorse]

academic postdocs don't pay that well (40k)...

That figure is outdated. All our postdocs get over 50k

[Jon Miller]

I think it somewhat depends on the institution and field. But it would be cool if the figure was outdated!

Jon Miller

[Kidlicious]

Originally posted by JohnT


That's what Adam Smith said back on page whatever: If you're going to look for a conspiracy, look at the refinery level.

It's not a conspiracy. Refiners just have it like that.

[Kidlicious]

Originally posted by Flubber
Gasoline is still a relatively low margin business IIRC and so is refining.

Refining is very high right now. Anyway, that's what I read.

[Kidlicious]

Here's a graph of market segmented BP refining margins. I think the're even higher now.

[Flubber]

An article on refining from the American Petroleum Institute

http://api-ep.api.org/industry/index.cfm?objectid=5C1AE70F-0129-449F-A6CEF327E2A0000F&method=display_body&er=1&bitmask=002007004000000000

Now I note that they cite a 5.0% rate of return on capital employed since 1990. This is what I was referring to when I cited this as a low margin business. Sorry if my wording was confusing.

The reality is that even if refining capacity is constrained, it will require much more than this rate of return to attract investment into refineries. I would not be shocked if they start attracting higher profit levels

U.S. Refining Industry: A System Stretched to the Limit



A reliable supply of affordable transportation fuels and other refined petroleum products is essential to sustained growth in the United States. However, it is becoming more and more difficult to meet this goal. In addition to the problems with declining U.S. production of crude oil, U.S. refinery capacity growth has not kept up with the growth in consumer demand for petroleum products. While environmental requirements are giving us the cleanest fuels ever, they have contributed to drastically reduced refinery flexibility and further tightened the U.S. supply situation.

Background
Demand for all petroleum products, including gasoline and diesel fuel, has been steadily rising with the continuing growth of the U.S. economy. Since 1994 steady GDP growth averaging 3.4 percent annually has caused petroleum product consumption to grow by 1.6 percent annually, for a total of 16 percent. The U.S. Energy Information Administration projects similar rates of increase in petroleum consumption for the decade.

The refining industry has been able to meet its objective of supplying American consumers with readily available, reasonably priced petroleum products. But massive investments will be required in the next 10 years, both to expand refinery capacity and to comply with environmental regulations. Combined with the historically low rates of return in refining, the size of these investments will make expanding refinery capacity increasingly difficult.

Since 1990, for example, the return on capital employed for refining and marketing has averaged only about 5.0 percent, making it difficult to attract investment capital.

The number of U.S. refineries peaked in 1981, when there were 315 operating refineries. Many of these closed in the 1980s because they were small and inefficient, owing their existence largely to government subsidies to small refiners that ended in 1981. However, even in the 1990s, as the industry faced increasing requirements for cleaner fuels and improved environmental performance, the number of refineries continued to shrink—from 194 in 1990 to 144 at the end of 2004.

With essentially no new refinery construction (the last major refinery built in the U.S. was completed in 1976), growth in capacity at existing refineries has offset the effect of refinery closures—particularly in the later part of the last decade, with the result that total refinery capacity has grown from 15.5 to 17 million barrels per day since 1990. But this increase has not been adequate to keep up with the growth in demand. As a result, refinery excess capacity has fallen dramatically. Refinery capacity utilization, which had averaged in the high 80s before the last decade, averaged almost 93 percent in 2004. This compares to an average utilization rate in other industries of about 82 percent. The very high capacity utilization rate of U.S. refineries has already reached the point where it poses the potential for supply interruptions and consumer hardship, since, with no excess capacity, a relatively minor incident may quickly cause a supply disruption and potential price impacts.

Constraints on U.S. Refinery Expansion

Increased environmental compliance cost is a major reason that refinery capacity expansion has not kept up with the growth in demand. From 1994 to 2003 the industry spent $47.4 billion to bring refineries into compliance with environmental regulations. That included $15.9 billion in capital costs and $31.4 billion in operations and maintenance costs for compliance with regulations covering air, water and waste rules. With historically low rates of return limiting the refining industry’s ability to attract additional capital, these expenditures have sharply limited refinery expansion.

The U.S. Environmental Protection Agency (EPA) has begun implementing new rules that will lower the sulfur content of domestic gasoline from about 340 parts per million (ppm) to an average of 30 ppm. That will cost refineries about $8 billion. And this excludes California where industry has already invested about $4 billion to meet that state’s lower sulfur standards. These rules add about 4.5 cents to the cost of a gallon of gasoline.

Meanwhile, in 2000, EPA also published a new regulation lowering the sulfur content in highway diesel fuel. This rule requires refiners to reduce sulfur content in highway diesel from 350 ppm to 15 ppm. That will require an $8 billion investment, adding 11.6 cents per gallon of diesel, but possibly costing consumers much more if, as many believe, supplies of this fuel turn out to be inadequate to meet demand. There is a significant concern that when this requirement goes into place in June 2006, there could be difficulty in getting on-spec ultra-low sulfur diesel to market.

EPA also promulgated fuel regulations for non-road, locomotive and marine (NRLM) diesel fuel that will require it to contain no more than 500 ppm sulfur effective June 2007. In 2010, non-road diesel sulfur levels would be capped at 15 ppm and in 2012 locomotive and marine diesel sulfur levels would be limited to 500 PPM. These non-road diesel requirements would result in more than $1 billion of additional cost to other sulfur reductions underway.

The outcome of the debate over MTBE is still underway. The Clean Air Act requires that reformulated gasoline (RFG) contain at least 2 percent oxygen. MTBE is an oxygenated additive that is widely used to meet that requirement. There are other additives, such as ethanol, that can be used to add oxygen to gasoline, but ethanol’s properties make it difficult to use in RFG. Within the last few years, there has been increased interest in reducing the use of MTBE because of concerns arising from its discovery in groundwater. The debate over MTBE and the RFG oxygen mandate continues to play out in the U.S. Congress as well as in state legislatures and at EPA. The cost to refiners to comply with likely MTBE restrictions will depend on several factors, including the need to maintain the environmental performance of RFG and whether the RFG oxygen mandate is eliminated or replaced with another mandate for renewable fuels, such as ethanol. Assuming MTBE is phased down and the oxygenate mandate is removed but no other mandate is substituted, the industry investment is estimated to be about $1.4 billion.

Based on these estimates, by 2010, the industry will have invested upwards of $20 billion to comply with just these three fuels regulations. This is in addition to the costs to comply with the multitude of existing environmental regulations.

In the face of this, it is not surprising that the U.S. actually lost more than 144,000-barrels per day capacity refinery in the last several years. Premcor closed two refineries in Illinois – in large part because of the company’s concerns over the large investments required over the next several years to comply with new EPA sulfur regulations for gasoline and diesel fuel.

Another cause for the absence of new refinery construction and capacity expansion difficulties is the prevalence of overlapping and complex permitting procedures. Permits are required to construct new equipment or modify existing equipment at refineries. Thus, the industry’s ability to acquire permits to expand capacity to meet growing demand is a major concern. U.S. refinery expansion will be required to meet product demand growth and to offset the production loss resulting from the more stringent product quality specifications, as well as possible refinery closures. The permitting [JP2] system is very complex and time-consuming, and it involves a number of permitting entities at the federal, state and local levels – sometimes with conflicting priorities – with the authority to stop or substantially delay the process.

Any new construction or equipment modifications that result in emissions increases above a certain threshold must undergo a New Source Review (NSR) permitting process. Under the Clean Air Act, if emissions increases are large enough, additional emissions controls must be installed on the equipment. Unfortunately, the NSR program is very complex and its applicability makes it difficult for refiners to determine when NSR permitting and controls are required. Implementing NSR is ill defined and time-consuming. For example, the NSR program provides for an exemption from the regulation for “routine maintenance, repair, and replacement” yet these terms are not clearly defined and have recently been the subject of new EPA interpretation. Also, refiners must obtain NSR permits before construction begins, and it often takes well over a year to obtain the permit. The result is an operating environment where there is a great deal of regulatory uncertainty related to the scope, timing, requirements and interpretations of the program. This situation makes the planning and execution of new refinery expansion projects very difficult and burdensome.

While refinery excess capacity shrank in the 1990s, the ability of the industry to efficiently utilize capacity by shipping product to areas of greatest need has been compromised by the steady proliferation of required fuels. A generation ago, gasoline was much more fungible, with product made for one region of the country easily shipped to another if a supply problem arose. That is no longer true.

Role of Imports

Imports are not new to the U.S. supply system, as the United States has been importing products routinely since W.W.II. Imports have provided an economic balance between domestic refinery production and consumer demand, which has been increasing over the last decade. Imports provide about 10 percent of U.S. petroleum product demand. Product imports are expected to continue to be available to the U.S. market in the future.

Between 1996 and 2000, distillate imports increased from relatively small volumes to more than 120,000 barrels per day. Since then distillate imports have tripled, averaging 345,000 per day in 2004, varying seasonally with the demand for heating oil.

Gasoline imports, including blendstocks, have steadily increased, reaching 911,000-barrels per day in 2004. The majority of gasoline imports are from the Atlantic Basin, with Canada, the Virgin Islands and Western Europe accounting for about two-thirds of the volume. A major growing supply source for gasoline imports is Western Europe. As that region’s highway fuels market continues to move towards diesel, gasoline demand has declined, enabling Western Europe refineries to provide more gasoline for export. This situation will likely continue for several years, although increasing demand in China and India may compete for those exports.

Conclusions

Continued U.S. economic growth will lead to continued growth in the consumption of petroleum products. This will put increased pressure on U.S. refiners to expand capacity at a much more rapid rate than they have been able to in the last 10 years. At the same time, U.S. refiners will have to invest very large amounts of money to produce the cleaner-burning fuels that will be required, to phase down the use of MTBE and to reduce refinery environmental impacts. With rates of return that have been at or below those earned in other industries, it is questionable whether all refiners will be able to justify the required investments.

Further limiting refiner’s ability to expand capacity is the difficulty refiners have experienced in receiving the necessary permits for refinery expansion and the uncertainty associated with complex and overlapping regulations.

The continued availability of reasonably priced petroleum products for U.S. consumers will require a solution to these problems.

[Kidlicious]

Originally posted by Flubber
An article on refining from the American Petroleum Institute

http://api-ep.api.org/industry/index.cfm?objectid=5C1AE70F-0129-449F-A6CEF327E2A0000F&method=display_body&er=1&bitmask=002007004000000000

Now I note that they cite a 5.0% rate of return on capital employed since 1990. This is what I was referring to when I cited this as a low margin business. Sorry if my wording was confusing.

The reality is that even if refining capacity is constrained, it will require much more than this rate of return to attract investment into refineries. I would not be shocked if they start attracting higher profit levels

Investment is always too little or too much, at least in the short run.

[Flubber]

Originally posted by Kidicious


Investment is always too little or too much, at least in the short run.

What does this mean ??


In refining, returns have been at or below the 5% mark for decades . .. and since refineries are a huge capital investment, returns have to be considered over decades. Even if profits were higher this year, its still not a great return considering the investment required