Friday, June 06, 2008

Finally, Some Rational Thinking in South Dakota


Investor's Business Daily: Thirty-two long years have passed since the U.S. had a new oil refinery. But a small South Dakota community wants to change that. Finally, some rational thinking.

Union County, home to 12,584 in South Dakota's southeastern corner, voted 58% to 42% Tuesday to approve a request by Hyperion Energy to build a refinery north of Elk Point, the county seat of 1,855. The facility, expected to turn out 400,000 barrels of ultralow-sulfur gasoline and diesel fuel a day, just might be the biggest thing to happen to the area.

As far as energy is concerned, it could be the biggest thing to happen to this nation since 1976, widely known as America's bicentennial year but less so as the date the last new oil refinery was built in the U.S. Since that refinery was built in Garyville, La., more than three decades ago, environmental groups have successfully bullied policymakers into blocking any new ones.

Meanwhile, America has gone from 301 refineries in 1982 to less than half that (149, see chart above). The refining process is far more efficient today, yet output hasn't kept pace with demand. As domestic oil consumption has increased from 17 million barrels a day in 1982 to nearly 21 million a day in 2007, the country now has to import 10% of the gasoline we burn. We just don't make enough.

Wonder no more why we've become so reliant on foreign crude to fuel our economy and have little choice but to do more business with unsavory characters than we should.

See previous CD post here on this topic.

9 Comments:

At 6/06/2008 9:19 AM, Blogger rufus said...

I don't see as how it's of much import to the nation as a whole. Refineries are running 82 - 88% of capacity. It will make it more convenient for the people of the Dakotas. They've been on the tail-end of the pipeline, and, as a result, running short on diesel from time to time.

Did I mention that when you reach the "Peak" of a finite resource you start to get violent price swings?

 
At 6/06/2008 9:57 AM, Anonymous Anonymous said...

Peak Oil?

We are DEFINITELY at "peak oil" if we DON'T drill for any new oil.

There is a lot of oil up in ANWR, there is a lot of oil in the Gulf that is "off limits". There is suspected oil in the Great Lakes, there is oil off the coast of California & Florida....ALL OFF LIMITS. I have spoken with petroleum engineers who have told me that vast areas of Iraq & Saudi Arabia have NEVER been explored OR were surveyed back in the 40's & 50's. They suspect if they used MODERN cutting edge technology that a LOT of reserves would be added.

This world has plenty of oil, but it needs to be explored and exploited.

 
At 6/06/2008 10:25 AM, Blogger Walt G. said...

I’m still not sold on environmentalists being the major reason a refinery has not been built since 1976. A factor? Yes. However, I believe business decisions are much more complex than that.

I doubt that lower gasoline prices are a top priority for any profitable company that is the business of supplying gasoline. And, I know this is not a popular position; however, I’m not sure than lower gasoline prices are fundamentally in our best interest in the long run.

After I mentally remove environmentalist activity from my thought process, I still have a couple questions that I would like to see if anyone can shed some light on.

If gasoline can be bought on the global market at a price where it can be sold and still make a profit, why would a company want to sink millions (billions?) of dollars into domestic refineries where any return on investment is very long term and questionable because of a possible decrease in demand?

In this era of globalization, why is importing finished gasoline from overseas with excess refinery capacity any different than importing crude oil and refining it here? Or, for that matter, buying imported electronic merchandises from China?

Anyone have any answers?

 
At 6/06/2008 11:06 AM, Blogger rufus said...

Oil isn't about "Reserves." Oil is all about "Flow Rate." Sometime in the next year, or so, we will hit Global Maximum Flow Rate. Some think we might be there Now.

Remember, when you're talking about "Bakken" you're talking about a multitude of little small pools of oil spread over a huge area. Expensive to find, and expensive to get up.

"Shale?" No one really knows how to do this, yet. We know it will be hugely energy-intensive, and, thus, costly. Anwar would take several years, and will probably produce less than a million bpd. Offshore? Maybe a couple of million/maybe not. Should we keep something in reserve?

If you're lower/middle income small-town/rural buy a still. If you're urban buy a small flexfuel/hybrid. If you're wealthy buy oil.

 
At 6/06/2008 11:18 AM, Anonymous diz said...

If gasoline can be bought on the global market at a price where it can be sold and still make a profit, why would a company want to sink millions (billions?) of dollars into domestic refineries where any return on investment is very long term and questionable because of a possible decrease in demand?

They would want to invest in refining if it is a better use of capital than other uses, one of which is returning it to sharegolders to invest in the broad market.

As I mentioned in the recent similar thread here, people have been investing in refining capacity. They have added significant capacity to existing refineries, increased the ability of the existing refineries to convert crude oil to gasoline and diesel (i.e. gaining more light products per barrel of input), and they have also invested compliance capital to meet changing fuel and emissions regulations.

In addition, several firms have used their captial to acquire large position in refining capacity.

If you sat and evaltuated an investment in refining (and I have), you'd pretty quickly come to the conclusion you are purchasing a multi-year long position in refining margin (value of products - value of crude.)

If you are not bullish on this position, you will likely invest elsewhere. However, for most of the last couple decades if you are bullish on this position (going long refining) you would simply buy an existing refinery. They have tended to trade for 10 to 50 cents on the dollar of replacement cost.


In this era of globalization, why is importing finished gasoline from overseas with excess refinery capacity any different than importing crude oil and refining it here? Or, for that matter, buying imported electronic merchandises from China?


For a variety of reasons the trend has historically been to locate the refinery near the market and transport the crude.

Part of this is that crude production in an area tends to rise and fall, whereas population tends to be stable. Part of it is that crude is more fungible than light products, and somewhat less costly to transport. Part of it is that you don't want to put a multi-billion dollar asset in most of the places crude is found. So, there's going to be plenty of crude on the water anyway. Buying crude off the water, then putting the product back on the water seems a bit costly.

Still, at some point other factors come in to play. If it's cheap enough for whatever reason (environmentalists, taxes, etc.) to build a refinery offshore and import the product people will do it. There are a couple refineries in the Virgin Islands (tax breaks) that may as well be part of the US, but probably show up as imports.

Another factor that sometimes drives imports is that the European markets are primarily diesel markets, while US markets are primarily gasoline. Sometimes there are refnieries in the North Atlantic that play off this arbitrage. If you get out a map, you'll see that Ireland isn't all that far way from New York Harbor. Shorter boat ride than Houston, I think.

As for this new refinery in the Dakotas, I imagine it is driven by the growth in captive crude in the area. As the canadian tar sands ramp up production, and perhaps the Bakken shale, that crude will have to have a home. The price of Canadian crude will fall until people use it instead of importing a waterborne barrel. Efficient upper midwest refineries have historically made a decent living off the Canadian crude discount and their advantaged proximity to the Chicago market. The alternative is always to bring an additional waterborne barrel into the Gulf Coast and pipe the product up.

Newspapers talk about one grade of crude in one place, but sometimes the regional and quality diffs drive decisions.

 
At 6/06/2008 1:30 PM, Blogger Ferd the Moon Cat said...

Please remember that the federal government subsidized small refineries in the 70s until Reagan discontinued that practice. Small, inefficient refineries received an allocation of crude oil that enabled them to stay in business far beyond their economic viability. In refineries, bigger is almost always more efficient. Better to graph total US refining capacity over this period. US refiners, stymied in attempts to build new refining sites, have instead increased refining capacity at existing refineries over the past 25 years.

 
At 6/06/2008 2:07 PM, Blogger randian said...

I'll believe this when I see actual construction. Still plenty of time for the lawsuits to start. We must get Congress to remove the private lawsuit statutes from federal environmental regulations.

 
At 6/06/2008 7:36 PM, Blogger juandos said...

Hmmm, rufus did you know that crude oil may not be the finite resource some are hoping?

In fact there may be a lot more oil than luddites want us to find and exploit...

walt g says: "I doubt that lower gasoline prices are a top priority for any profitable company that is the business of supplying gasoline"...

Well we know the government doesn't want lower gasoline prices since the government makes more, a lot more on the price of a gallon of gasoline than the oil companies do...

BTW the oil industry has been calling for the building new refineries for quite some time now...

 
At 6/06/2008 11:53 PM, Anonymous Anonymous said...

Hopefully, this will be a start of a trend, but refining is only part of the story - we need to get domestic crude production revved up and get pipelines built to distribute the stuff as well.

I'm most concerned about our inability to control our destiny when we are so reliant upon foreign suppliers, some of which aren't exactly our friends.

 

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