What Would Ron Wyden Do?

The refining sector has been in the news a few times this week, and not in a good way:

A Fine Mess For U.S. Refineries

HOUSTON — Excess capacity, weak demand for fuels and rising product inventories continue to squeeze margins for U.S. oil refiners.

Sunoco, the second-largest refiner in the country that doesn’t produce its own oil, said late Tuesday that it will soon shutter its Eagle Point refinery in Westville, N.J., which has a capacity to handle 145,000 barrels of oil per day. During the second quarter, Philadelphia-based Sunoco lost $77 million in its refining business and told analysts Tuesday that the third quarter could be worse.

A point that I have tried to stress is that for the most part, refining is not a lucrative business. It is a risky business. You may have five poor years and then one or two really good years. And then when you have a good year, you are accused of gouging and everybody wants a bigger piece of the profits – while sharing none of the risk. You can’t find those people during the bad years; they only show up when times are good.

I couldn’t help but think of Oregon Senator Ron Wyden when I read about the shuttering of the Sunoco refinery. You see, Senator Wyden has devoted a lot of time to investigating these sorts of “shady” practices, where refiners shut down refineries just to limit capacity and boost profits. He produced a comprehensive report on this a few years ago:

The Oil Industry, Gas Supply and Refinery Capacity: More Than Meets the Eye

Two excerpts from the report:

Specifically, the documents suggest that major oil companies pursued efforts to curtail refinery capacity as a strategy for improving profit margins; that competing oil companies worked together to subvert supply; that refinery closures inhibited supply; and that oil companies are reaping record profits, yet may benefit from a proposed national energy policy that would offer financial incentives to expand refinery capacity.

The major oil companies had a financial interest in seeing the closure of independent refineries. By reducing the overall supply of oil and gas and reducing the number of companies involved in producing it, the major oil companies can have tighter reins on the supply and the price.

You see, Senator Wyden believes that when refineries shut down, it is some sort of organized attempt by “the industry” to reduce capacity and boost prices. When prices are sky high, this may seem like a plausible explanation. When a refiner is losing millions quarter after quarter, it no longer seems so plausible. It looks like someone exiting a business they no longer find profitable.

I documented some of Wyden’s silliness in Gasoline Prices Part II: Long-Term Factors. The bottom line is that refiners may eventually once again benefit as excess supply is shut down. And that’s the way it works in any business. If you are producing too much of something, the price is low and marginal producers go out of business.

A lot of refiners are in trouble right now. Sunoco won’t be the last one to shutter a refinery. Maybe two or three years from now, we will once again see a short burst of profitability as the supply/demand balance tightens back up. But maybe Sunoco’s Eagle Point refinery has lost half a billion dollars by then. This is the calculation they have certainly gone through, and their conclusion is that they will be better off to shutter the refinery.

But what would Senator Wyden do if he owned Eagle Point? I have to conclude, based on his report above, that he would continue running it so prices remained low for everyone. In fact, I wouldn’t be surprised to see him expanding capacity. He might end up losing a few hundred million dollars each year, but hopefully he has a big pile of money to draw upon. It reminds me of the joke about the farmer who won the lottery. When asked what he would do with his winnings, he replied “I’m just gonna keep farming until the money is all gone.”

Senator Wyden – and a great many others who think as he does – would apparently keep refining until the money is all gone.

18 thoughts on “What Would Ron Wyden Do?”

  1. My home state, Oregon, that I left 40 years past, is well known for natural wild beauty, low paying jobs and sending idiots to Washington.

    I think it is something to do with the air! The Oregon senators and congressmen expend great amounts of wasted effort tilting windmills etc.

    Oregon always ranks in the lowest group of states for pay for engineering professions. Too many people for the small industrial base and it is almost impossible to build industry due to the green laws.

  2. I keep wondering why the oil industry does nothing about such goofy claims. What about suing for libel? Maybe the fuss would draw some attention to such institutionalized silliness.

    I'm waiting for Wyden to write a hard hitting, deep digging expose on the US steel and auto industries. Obviously, massive attempts at manipulating supply to drive up prices.

  3. Look at the bright side of the wooden arrowgate – Gordon Smith and Ron Wyden were tilting a 200,000 USD windmill rather than a multi-billion one!

  4. Your link to Senator Wyden's report is kaput

    Thanks. Should be fixed. The link was doing some really weird stuff. Every time I put it in, it added my blog name to the front part of the link when I published. I was only able to fix it by using your "no follow" modifier. I have never seen that before.

    Cheers, Robert

  5. The other side of the refinery shut-down equation is increasing imports of refined products — from those oh-so green Europeans as well as from new refineries in Asia & the Middle East.

    Used to be conventional economic wisdom to ship the low value raw material (crude oil) to the place of use, and refine it into high value products there. Of course, that was before the growth of the Political Class, with all their job-destroying stupidity.

    Since RR is concerned about the costs of importing raw materials, what about the costs of importing value-added products like gasoline & jet fuel?

    Don't underestimate the impact of excessive government regulation on driving business out of the US. Now we have about 20 Million un/under-employed US citizens and and an unsustainable bill for imports of things that used to be made in America. You would think that Norway's Hero would be smart enough to figure out what needs to happen. Let's keep hoping for change.

  6. We may be witnessing the beginning of the end for the Oil Age. We have excess refinery capacity in the US, and I think it will just get worse for decades.
    Demand is headed south, and permanently.
    Quite a difference from the gasoline-shortage scare stories some were passing of a couple summers back.
    Remeber, an increase in fleet average mpg by 10 percent, and a 10 percent decereas ein miles driven means a 1/5th reduction in gasoline demand.
    Dopes anybody really think the fleet can only become 10 percent more efficient? Are not we really looking at a 100 percent boost in average mpgs in the next 20 years? Maybe more? What if PHEVs become common?
    What if CNG becomes popularized. Or methanol?
    Refineries are a poor bet going forward.

  7. Clee-
    From the bottom of a recession, and $4 gasoline, yes there has been a minor bump up. But compare back to 2006-7. The road forward is decidedly gloomy for refiners.
    If we do get $100 oil, gasoline demand will decline every year. It will anyway at lower price, but more slowly.
    You cannot have it both ways, this is we have scarce oil but refinery shortages to boot.
    Refiners are going to be stuck with excess demand for decades. The good news is that the least efficient facilities can be taken out of production.

  8. "We have excess refinery capacity in the US"

    Benny — carry on like this and you may end up with the Nobel Peace Prize.

    Come on, you are not that naive! The US imports refined products — because the US does NOT have an excess of refinery capacity. In reality, the US has an excess of greedy lawyers, stupid politicians, and Neo-Stalinist pretending to be saving the planet while they actually grab for power.

    The world may have a surplus of refining capacity, but it is US political policies which make the US refineries (the ones with the huge advantage of proximity to market) uneconomic.

    This almost makes me long for the days when Rufus was talking about ethanol!

  9. K, when we get through refining oil we have a little excess diesel left over. We export that to Europe, and Mexico. When Europe gets through meeting their demand for diesel they have a little gasoline left over which they export to us.

    There are refineries in the Caribbean that export gasoline to us, and Diesel to Europe. It's all a very complex, and interrelated thing.

    But, yes, we will continue to close some refineries. (on the other hand, we will expand the capacity of others to refine the heavy, nasty, sour stuff.)

    Have I mentioned, I think ethanol is the *nuts?* 🙂

    BTW, our gasoline demand is back up to 9.0 – 9.1 Million barrels/day. It got down to around 8.6 mbpd, or thereabouts, I think.

  10. Robert, I read your article at TOD about summer/winter blends. Regarding RVP issues with butane: What would this mean for the move of some towards biobutanol?

  11. Kinu-
    Our feelings about lawyers and government subsidies/regulations are mutual.
    True, I have not considered gasoline imports–but you are the original free trader, happy when we import oil. What gives?
    Let me put it this way: If we have $100 oil for a long run, then the refinery capacity of the United States will be very lush.
    According to Wood MacKenzie, the world is heading for a long-term headache-glut of refinery capacity. It might not be the best time to build a refinery, in the US or anywhere.
    Don't worry, Kinu, I still think the price mechanism is the best way to solve our energy problems–it is just that I think the price machanism, and free enterprise, will within a few short years render oil a shrinking industry–that, and the fact that oil is controlled by thug states, who are unreliable suppliers, and given to creating price spikes.
    You don't create a loyal customers base by threatening high and erratic prices, and supply shortages. I haven't seen that taught in business school as a successful model.
    Now, maybe the thug states will turn all lovey-dovey, and in that case we have another 50-100 years of the Oil Era. I am not holding my breath.
    In fact, if I live long enough, I expect to see someday all those towers in Dubai become "see-through" palaces. Nobody in 'em.
    I give it 30 years. I may not make it, but maybe…..

  12. "When Europe gets through meeting their demand for diesel they have a little gasoline left over which they export to us. … It's all a very complex, and interrelated thing."

    Yes it is. In the spirit of RR, let's look at some data. From the Oil & Gas Journal, 9/21 (the one to hand), the US imported that week 9.002 Million Bbl/Day crude oil, and 2.397 Million Bbl/Day refined products.

    Sunoco's troubled Eagle Point refinery has a capacity of 0.145 Million Bbl/Day — representing barely 5% of imported products.

    Remember, the US refinery should be at a great advantage because it is right in the end-market, with lowest costs for moving the output to the consumers.

    The US has a self-imposed (i.e. Political Class imposed) burden — hence Obama's 20 Million un- & under-employed fellow citizens.

  13. The US has a self-imposed (i.e. Political Class imposed) burden — hence Obama's 20 Million un- & under-employed fellow citizens.
    Right. And those rugged individualists in Europe have no environmetal legislations, putting their refiners at an obvious advantage…

    You are barking at your own shadows, Kinu. We need environmental legislation to keep our country livable. Look what the Clean Water Act did for rivers.

    Of course, the debate on where to draw the line continues…

  14. RR,
    Great story. I always think if you explained refiners are different to drillers, in spite of ignorance, often from those who protest the loudest ("It's all Big Oil to me"), it would be very helpful. It would also be clear to see who benefits under high oil prices (drillers), while others (refiners) may actually suffer as they pay high prices for feedstock, have limited ability to pass that cost along and face reduced demand.

    It would also put to bed those wild claims by our allies, OPEC, that high oil prices are due to "a lack of US refining capacity"…

  15. Kinu – one interesting fact I picked up from Washington state's recent Gas Price Study was that transportation was a fairly minor aspect of pricing – paradoxically, after remote Port Angeles on the Olympic Peninsula, the highest prices paid in the state were those in Anacortes and vicinity, kitty corner from the state's major refineries. Lack of competing sources of supply was the major reason giving; also the influx of Canadians crossing the border to flee their nation's severe taxation bumps up demand. In contrast, the lowest prices in the state were found in the eastern section, where fuel can be trucked in, barged in, or delivered by two pipeline systems.

    Whether this is applicable on a global scale to where distance is a minor factor I'm not sure, but you definitely have cargoes being shipped everywhere to arbitrage. Of course if we had to ship in 50% of our product we'd definitely pay a premium, I'd think. I'm waiting for hell to be raised about this, too: Knocking on OPEC’s Door: The U.S. Becomes a Major Oil Exporter — MasterResource. Fun blog – Julian Simon deification – Mike Lynch is a contributor – just noticed the other day his lame repost to critics of his NYT op ed from last month. Anyway, all of this product leaving the country would sure make for great political hay.

  16. "We need environmental legislation to keep our country livable. … Of course, the debate on where to draw the line continues…"

    Exactly — the debate continues.

    Actually, it is not much of a debate. It is fairly obvious that the Political Class in the US has way overshot the mark with "environmental" regulation. When the Euros have a more industry-friendly environment than the US, the case is pretty much closed.

    And when the US no longer has the capacity to manufacture (e.g.) the high-end steel pressure vessels used in nuclear power plants, the case is pretty much closed.

    And when the US has about 20 million un/under-employed citizens, the case is pretty much closed. Human beings are part of the environment too.

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