Dangerous Trend in the US Oil Industry

July/20/2011 16:47PM
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Until the last few years the US was dominated by integrated oil companies. These were mostly international oil companies that had exploration and production(finding and drilling for oil), transportation, refining, and marketing. As such, they had integrated management from the wellhead to the consumer’s gas tank.

First came the mergers, Exxon and Mobil, BP and Amoco and Arco, Phillips and Conoco, etc.

Now comes the separation of business units. This week Conoco and Phillips announced they would separate exploration and production from refining. This follows Shell, Chevron, and BP announcements to unload refining assets since high energy costs have eaten into refining profits.

When integrated ,all these assets, oil wells, pipelines, tankers, refineries, and retail outlets were in the hands of deep pockets. Business units transferred products between each other with transfer prices. The business units had profit goals based on those transfer prices. When E&P was being pinched by low crude prices, transportation, refining, and marketing could pick up some of the slack, When crude prices went up, refining and marketing were pinched, but E&P could pick up the slack.

Here’s the rub. Refineries in this country are being held together with baling wire. Most are between 50 and 120 years old. Huge amounts of capital investment will be needed to keep them running for another 20 years. The kind of money large integrated oil companies possess.

Somewhere down the road these divestment decisions will create major problems for US gasoline and diesel prices. When energy crises occur in this country they are usually the result of decisions that were made years ago, not last week. When the crisis hits, it’s way too late to fix the problems.

Releasing oil from the strategic petroleum reserve will not resolve massive refinery closings in the US.

Those refinery closings will not come in a condensed time frame. Each one that closes will push prices higher. This will give relief to the remaining refineries. But, pain to the motorist, the airlines, and the rail and trucking industries as well as chemicals. It will happen slowly like erosion. When capital costs can’t be justified at a given refining margin, the buyer’s of these refineries will just walk away.

Ignorance of the energy business is so rampant in this country that these things fly under the radar. No one in Washington will notice.

Not until a refinery like the Whiting, Indiana refinery closes. Then gasoline prices will spike in the Chicago Metro market, politicians and the media will be looking for someone to blame and consumers will never know that decisions that are being made today will be the reason.

When you’ve been trashed by the government and the media for 40 years, and when most of your profits come from places other than the US, and when you see capital requirements are too big to keep 80 year old facilities running, you just decide to sell. Get what you can and let the buyer beware.

That’s whats happening in the refining industry in the US today and there will be hell to pay down the road.

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