Down with the evil Gas lords II: Kaak's Revenge!

[Imran Siddiqui]

Yeah, when you can get better rate of returns on CODs, I don't think many people are going to 'expand' or 'enter' and build billion dollar refineries so easily.

Maybe if it stays at 18%, we'll see new refineries going up.

[Kidlicious]

Originally posted by Imran Siddiqui
Maybe if it stays at 18%, we'll see new refineries going up.

Why wouldn't it stay at 18%? Demand for gasoline has been increasing for decades if not since it's invention. So why aren't they expanding now.

[Imran Siddiqui]

Originally posted by Kidicious
Why wouldn't it stay at 18%? Demand for gasoline has been increasing for decades if not since it's invention. So why aren't they expanding now.

Guess I was right... in the Kidiverse, refineries go up in 2 hours time!

[Imran Siddiqui]

An interesting article on refinery construction in the US (written in May 2005):

http://www.nytimes.com/2005/05/09/business/09refinery.html?ex=1273291200&en=6e21e2b088549bdc&ei=5088&partner=rssnyt&emc=rss

May 9, 2005
No New Refineries in 29 Years? There Might Well Be a Reason
By JAD MOUAWAD

About 100 miles southwest of Phoenix, in a remote patch off Interstate 8, Glenn McGinnis is seeking to do something that has not been done for 29 years in the United States. He is trying to build an oil refinery.

Part of his job is to persuade local officials and residents to allow a 150,000-barrel-a-day refinery in their backyard - no small task. Another is to find investors ready to risk $2.5 billion in a volatile industry. So far, the effort has consumed six years and $30 million, with precious little to show for it.

Oil industry analysts and trade organizations like the American Petroleum Institute say they know of no one else doing the same thing.

Even so, Mr. McGinnis - an industry veteran who joined Arizona Clean Fuels last year as chief executive to give the project more heft against long odds - cleared a significant hurdle recently when Arizona awarded him a crucial emissions permit. Still ahead are countless rounds of negotiations with local, state and federal agencies to secure dozens more permits.

Meanwhile, the 1,400-acre site picked for the refinery, an old citrus grove near the Mexican border, remains empty, a sign of why the United States is now grappling with an acute shortage of plants that can refine the more than 20 million of barrels of crude oil that the country consumes every day.

The last refinery to be completed in the United States was in 1976, and Mr. McGinnis knows all too well that community and political opposition squashed earlier projects. His proposed refinery in Arizona has already been forced away from its original site near Phoenix, in 2003, after the state considered expanding the city's clean-air limits.

But times may be changing, said Mr. McGinnis, an oil business veteran of 33 years who has run refineries in the United States and Aruba.

"The moon and the stars have aligned for us," he said, speaking on his cellphone between discussing crude oil supplies with Mexico's state oil company. "We're halfway through, and we still have a lot of work."

Long considered the ugly duckling of the oil industry, the refining business is now in the spotlight as Americans complain about sticker shock at the gasoline pumps and higher energy prices over all.

President Bush has taken notice. Last month, Crown Prince Abdullah of Saudi Arabia, visiting the president at his Texas ranch on April 25, chided him with the message that his country could send more oil, but the United States would not have the ability to refine it. Soon afterward, Mr. Bush offered to provide closed military bases for new refineries.

Over the last quarter-century, the number of refineries in the United States dropped to 149, less than half the number in 1981. Because companies have upgraded and expanded their aging operations, refining capacity during that time period shrank only 10 percent from its peak of 18.6 million barrels a day. At the same time, gasoline consumption has risen by 45 percent.

But in the last two years, the refining business has experienced a revival of sorts, leading some refiners to predict they have entered an age of higher margins and better returns. Not everyone agrees, but for the first time in a long time the industry is more confident about itself. Even with better economics, however, it is still tough to build a refinery from scratch. Mr. McGinnis says he is not afraid of the challenge. He and his staff work in a small office in Phoenix, mostly consumed these days with securing permits and looking for financial backing.

The next step is to complete an environmental impact statement for the federal Bureau of Land Management. That will include an assessment of the refinery's impact on underground water sources and endangered species, as well as its effect on any Native American burial grounds.

After that, the project needs to get the site's zoning changed by Yuma County from agricultural to heavy industrial; Arizona's preservation office needs to be convinced that the refinery does not trample on any ancient historic site or trail; and finally, the project must apply for a presidential permit, which is issued by the State Department, to allow the crossing of a 200-mile pipeline into Mexico.

The business of turning crude oil into gasoline, jet fuel or heating oil has rarely been a lucrative proposition. It has dismal profit margins compared with its more glamorous cousin, exploration. It is highly cyclical and fairly unpredictable, because demand for gasoline swings sharply by season. And because of low oil prices over the past decades, refiners have been forced into cutthroat competition that has driven many of the smaller refiners out of business.

More refining capacity will almost certainly be needed. Gasoline demand is forecast to rise 39 percent by 2025, to 12.9 million barrels a day, up from today's 9.3 million barrels, according to a long-term outlook by the Energy Information Administration. By then, gasoline alone will account for nearly half the crude oil consumed in the United States.

By contrast, domestic refining capacity is expected to grow only by 0.8 percent from 2005 to 2007, slightly less than the 0.9 percent increase registered between 1998 and 2004, according to Jacques Rousseau, an oil analyst with the investment banker Friedman, Billings, Ramsey.

Jay Saunders, who follows oil companies for Deutsche Bank, said that the increase in refining margins would lead to increased capacity. "The industry is definitely going to overbuild," he said, "they have in the past and they will in the future."

Others caution that the industry should be wary of recreating a glut of capacity that would cause profit margins to sink again. "Refining has been a cyclical business for a long time," said Bill Hauschildt, the vice president for global refining with ChevronTexaco. "In the past few years, there's been much more discipline in the market for not overbuilding capacity."

Part of the issue, according to refiners, is that substantial investments were made over the last decade to lower carbon emissions and meet low-sulfur fuels regulations. The American Petroleum Institute estimates the industry invested $47 billion on such investments. More investments will be needed through 2007 to clean up gasoline and diesel.

"This is going to cost you money and the only thing you will get is cleaner air and less emissions - which are good - but no new capacity," said Edward H. Murphy, the industry group's general downstream sector manager.

"What refiners need are clear guidance on what's permissible and what is not if they want to expand," Mr. Murphy said. "So far, that has not been very clear."

To make up for the domestic shortfall, gasoline imports from Europe and South America have been rising in recent years. Gasoline imports now account for nearly 10 percent of domestic consumption and have exceeded a million barrels a day on average throughout April.

But even as the United States grows more reliant on foreign gasoline, it will face mounting competition from other buyers where demand is similarly growing, like China and India. "More competition means imports might become more expensive," said Joanne Shore, an analyst with the government's Energy Information Administration.

For Bob Slaughter, the president of the National Petrochemical and Refiners Association, the industry's main trade group, "The question now is to keep the growth in imports at a reasonable level." He expects additional capacity will come from expansion of existing projects and not from the construction of new refineries like the one in Arizona.

Even if all goes to plan and investors are found, Mr. McGinnis's envisioned refinery will not be ready before late 2009.

The prospect of a new employer, 3,000 construction jobs and 600 permanent posts has done a lot to outweigh concerns over the project, said John Nussbaumer, the mayor of Wellton, a city of 1,900 people about 20 miles from the refinery site.

"Of course I am concerned about the effects on the environment," he said. "Would I rather see it somewhere else? Yes. Would I oppose it at this time? No. It's been too long since a new refinery was built in the United States. Anything we can do to reduce our dependency on the Middle East is a good thing."

Hey look, there was CUTTROAT competition when prices were lower and it wiped out a number of smaller refiners, in an industry with small profit margins. This refiniery has taken 6 years, $30 mil and nothing so far. It was forced from its original place, because people didn't want it there, and is trying to cut through masses and masses of red tape to try to get this thing built.

Yeah.. it's the refineries fault though

And it isn't like the New York Times is some right-wing rag either.

[Zkribbler]

Has anyone been checking how gasoline prices are doing in places like Europe and Japan?

If the oil company apoligistas are correct and this is a worldwide supply-and-demand problem, then gasoline prices over there should have gone up 50% in the past couple of years.

[Velociryx]

Imran, you've just got blinders on...that's all.

Kid is right, and he knows what's best.

Miss Cleo tol' me so.

-=Vel=-

(and for the interesting read! Good find)

[Kidlicious]

Originally posted by Imran Siddiqui
Hey look, there was CUTTROAT competition when prices were lower and it wiped out a number of smaller refiners, in an industry with small profit margins. This refiniery has taken 6 years, $30 mil and nothing so far. It was forced from its original place, because people didn't want it there, and is trying to cut through masses and masses of red tape to try to get this thing built.

Yeah.. it's the refineries fault though

And it isn't like the New York Times is some right-wing rag either.

Good article, but I'm not blaming anyone. I'm just pointing out the facts. The market is now undersupplied. It's natural for markets to become over competitive, and conversely under competitive cyclically, but when margins are high and demand is forecasted to increase competitive markets become more competitive. That's not what is happening here. Ergo, the refining industry is not competitive.

[Kidlicious]

Originally posted by Imran Siddiqui
Guess I was right... in the Kidiverse, refineries go up in 2 hours time!

I know they don't go up in 2 hours. That's why you build them ahead of time.

[KrazyHorse]

Originally posted by Zkribbler
Has anyone been checking how gasoline prices are doing in places like Europe and Japan?

If the oil company apoligistas are correct and this is a worldwide supply-and-demand problem, then gasoline prices over there should have gone up 50% in the past couple of years.

Not if gas taxes are on a per liter basis instead of a per dollar basis.

Excise taxes in the US are levied per gallon...

If the "base price" of gas is the same in the US and Europe, then here's a demonstration of this:

2000: base price 0.40$ per liter
some US state: 0.12$ per liter excise tax, 6% sales tax, total price 0.551$ per liter
some euro country: 0.55$ per liter excise tax, 15% sales tax, total price 1.092$ per liter

2006 base price 0.70$ per liter
some US state: 0.12$ per liter excise tax, 6% sales tax, total price 0.869$ per liter
some euro country: 0.55$ per liter excise tax, 15% sales tax, total price 1.437$ per liter

increase in the US state: 57.7%
increase in the euro country: 31.6%

Not to mention the fact that the value of the respective currencies change.

[Flubber]

Originally posted by Kidicious


I know they don't go up in 2 hours. That's why you build them ahead of time.

Well nobody prevented ANYBODY from doing this. Existing refiners don't hold some magical right to build the next one and many of them are probably as exposed to the US refinery market as they wish to be. So why blame the current refiners? . .. after all they actually have refineries. Or do you attribute them fault for not building more?

If it was so obvious that this would be needed, why didn't someone else jump on this great opportunity? heck if its such a necessary, a government would have been free to build one using tax money

[Imran Siddiqui]

Originally posted by Zkribbler
Has anyone been checking how gasoline prices are doing in places like Europe and Japan?

Just saw on CNN International this morning a report on how prices are shooting up in Europe and Asia. Price is around $6/gal in London and $6.65/gal in Oslo.

[q=Kid]Good article, but I'm not blaming anyone. I'm just pointing out the facts. The market is now undersupplied. It's natural for markets to become over competitive, and conversely under competitive cyclically, but when margins are high and demand is forecasted to increase competitive markets become more competitive. That's not what is happening here. Ergo, the refining industry is not competitive.[/q]



You obviously read the first paragraph of the article and moved on. Read the whole thing. Especially the parts where analyists are saying there will be overgrowth in the refining market since the rates have risen so that building more is once again profitable.

[Flubber]

Originally posted by Kidicious


Good article, but I'm not blaming anyone. I'm just pointing out the facts. The market is now undersupplied. It's natural for markets to become over competitive, and conversely under competitive cyclically, but when margins are high and demand is forecasted to increase competitive markets become more competitive. That's not what is happening here. Ergo, the refining industry is not competitive.

If we accept the base premise that the market is currently undersupplied, I still don't see how you get to your conclusion that it is not competitive. In fact it appears to be the case that it was tight competition and tight margins that forced out some suppliers.

Now the demand curve shifted in a way that was not anticipated and the surviving refiners are actually making a decent rate of return. That does not change the fact that the players have been in a competitive marketplace for a long time

[Kidlicious]

Originally posted by Imran Siddiqui
You obviously read the first paragraph of the article and moved on. Read the whole thing. Especially the parts where analyists are saying there will be overgrowth in the refining market since the rates have risen so that building more is once again profitable.

I did read the whole article. Overexpansion is expected. That's the way competitive markets work. But the market isn't expanding at all, so how is it suppose to overexpand.

[Flubber]

Originally posted by Kidicious


I did read the whole article. Overexpansion is expected. That's the way competitive markets work. But the market isn't expanding at all, so how is it suppose to overexpand.

and exactly how quickly do you expect the new refineries to be built-- Remember your own link showed a NEGATIVE rate of return just 2 years ago. Didn't you read how the approvals and financing can take years before you ever get tobreak ground?


It sounds to me that your complaint boils down to the fact that the market hasn't reacted quickly enough.

[Kidlicious]

Originally posted by Flubber
If we accept the base premise that the market is currently undersupplied, I still don't see how you get to your conclusion that it is not competitive. In fact it appears to be the case that it was tight competition and tight margins that forced out some suppliers.

Undersupplied market = monopoly power

If supply doesn't meet demand it's because the suppliers have pricing power.

Now the demand curve shifted in a way that was not anticipated and the surviving refiners are actually making a decent rate of return. That does not change the fact that the players have been in a competitive marketplace for a long time

I don't think that 18% is just a decent return. Why do you say that? 10% is normal I think.