Refinery Closures and the Keystone Pipeline
There have been several announcements in recent months of refinery closures that will likely impact gasoline supplies (and prices) on the East Coast. Some of those closures have been on the East Coast. Others — such as the Hovensa refinery in the Virgin Islands and some European refineries — supply product to the East Coast.
So why are these refineries closing?
Basically, despite the very popular image of perpetually fat profits for the oil companies, the refining business has been historically poor. If a refinery often operates in the low single digit rates of return — or as has frequently been the case, loses money — oil companies will eventually shut them down. Even if other parts of the business are making money, they won’t keep funding a money loser.
But why do refineries struggle with profitability?
In recent years, demand for gasoline has been down due to high prices in the U.S. As oil prices have climbed, refiners have struggled to pass on all of the increased costs of those higher oil prices to consumers. They would like to sell gasoline for a bit more, but the reduced demand keeps their margins low for the most part. Ultimately some are forced to shut down. That will also mean higher gasoline prices for consumers:
“On January 18, Hess announced the closure of its HOVENSA joint venture refinery in the U.S. Virgin Islands, a major source of product supply to the East Coast,” the Energy Department said. “That planned closure follows on the heels of the idling of two refineries in the Delaware Valley by Sunoco and ConocoPhillips and announced plans by Sunoco to idle another refinery in the region by mid-2012.” The Energy Department added, “The complete idling of the three refineries would collectively cut as much as 50% of current East Coast refining capacity.”
Operating a Refinery Requires Manpower and Creates Jobs
In addition to higher prices, the closures mean loss of jobs in a very tough economy. As I pointed out recently in What’s So Bad About Exporting Gasoline?, one way to keep those refineries going is something that some have complained about, and that is for refiners to export finished products. It should be clear by now that these refiners must find additional markets (or cheaper oil) if they are to survive.
These thoughts were rattling around in my head the past few days, and just today crystallized into this post. One of the things I have been thinking about are the implications if the Keystone Pipeline is or isn’t built. I have explained my views on the pipeline in a series of recent posts, so I won’t rehash them here. But basically, I have tried to sort out the most likely implications in either case. If the pipeline isn’t built, will it slow down the development of the oil sands in Canada? Will that oil continue to get to market, but in environmentally riskier ways (like trucking or rail). Will it cause Canada to more aggressively seek other markets for their oil? Probably:
Prime Minister Stephen Harper says Canada’s national interest makes the $5.5 billion pipeline essential. He was “profoundly disappointed” that U.S. President Barack Obama rejected the Texas Keystone XL option but also spoke of the need to diversify Canada’s oil industry. Ninety-seven percent of Canadian oil exports now go to the U.S. “I think what’s happened around the Keystone is a wake-up call, the degree to which we are dependent or possibly held hostage to decisions in the United States, and especially decisions that may be made for very bad political reasons,” he told Canadian TV.
The article notes that pipelines are rarely rejected in Canada, but Keystone opponents are counting on that oil not being able to reach the Pacific Coast for export to China. After all, if it does then they will have made matters worse by blocking the route into the U.S. and forcing the oil to travel a further distance to market.
The Keystone Pipeline is of course really about climate change. Opponents want to stop the expansion of the oil sands, and so they have thrown several wedge arguments out there in order to reach their ultimate goal.
Conclusion: Exporting a Product is Good for Business*
One of the wedge arguments is about job creation. Proponents have made certain claims (in many cases inflated) about the number of jobs that will be created. Opponents counter that there won’t be that many jobs created, and besides some of the oil is going to be exported.
That may be the wrong way to look at it. If you see what is happening with the refinery closures, what a pipeline to the U.S. Gulf Coast may do is keep some of the refineries there in business. Imagine if these East Coast refineries — which don’t have easy access to affordable oil — were at the end of the Keystone Pipeline. They might have managed to stay in business. Sure, they might export some of the gasoline and jet fuel. So what? Will the product simply not exist on the open market if those refineries didn’t make it? Not likely; it would just be refined by someone else.
So we may look back in a few years — as we are closing down Gulf Coast refineries because their major source of oil is ever more expensive crude from the Middle East and Venezuela — and realize that those jobs could have been saved if only they had better access to a friendly, stable supply of oil. So what if we import Canadian oil and export gasoline? In an oil crisis, we won’t export the gasoline. We will use it right here at home. That is, if the refineries actually have access to the crude.
* Incidentally, now that the ethanol subsidy has expired, I feel the same way about exporting ethanol. If that’s what it takes for them to stay in business, as long as they aren’t exporting taxpayer subsidized product then more power to them.