Valero Energy (VLO) will close it’s 192,000 barrel/day Delaware refinery less than a month after Sunoco Inc. (SUN) announced that it was closing a 145,000 barrel/day refinery in New Jersey. Flying J, a privately-held company with refineries in Salt Lake City and Bakersfield, has put both refineries up for sale as it tries to emerge from Chapter 11. Western Refining (WNR) is closing its Bloomfield, New Mexico, refinery in order to save $25 million annually.
And the bad news goes on. Frontier Oil (FTO) is changing its inventory valuation method to the refinery industry standard Last-in-First-out (LIFO) and will suspend 2009 dividend payments on its senior notes. Tesoro Corp. (TSO) expects to run its refineries as low as 77% of capacity.
Add to the mix higher prices for crude, capacity utilization industry-wide stands at about 80%, and margins are falling. Is there anything that can preserve U.S. refining?
As recently as three years, the big story about refining was how there was not enough U.S. capacity to meet demand. Refineries were running flat-out as crude oil prices rose and demand for motor fuel drove pump prices to record highs. Refining margins were high and profits were plentiful.
Then demand dropped due to the high pump prices. In response, crude prices cratered, but demand didn’t recover. Now, refiners are being forced to close plants, lay off workers and cut dividends.
The depressing news doesn’t even end there. The U.S. imports almost three times as much finished gasoline now as it did in 1982 or 1992. Last week, U.S. imports of gasoline totaled 584,000 barrels, about 36% less than the 915,000 barrels imported in 2002.
Imported gasoline is the medium-to-long-term threat to refiners. Export refineries in India, Saudi Arabia and elsewhere are positioned to drive domestic U.S. refineries’ margins even lower, regardless of whether crude oil prices are high or low. These new refineries are massive (up to 600,000 barrels/day), incorporate the latest technology and are geographically situated to feed the exploding markets of China and India.
If U.S. refiners cannot figure out new ways to be competitive, the U.S. will end up importing even more refined products going forward. Overall, prospects for U.S. refiners look very bleak.
