In 2008, refineries in northwest Europe enjoyed a $6.72/b refining margin. Within a year, the margins had fallen to $3.26/b, and are now about $3.55/b. At the 2008 peak, crude oil costs were dropping faster than pump prices, and refining was a big money-maker.
Companies like Royal Dutch Shell plc (NYSE: RDS-A), Total SA (NYSE: TOT), and Eni SpA (NYSE: E) refine a lot of oil in Europe, but the soft global economy and the collapse of the euro have weakened demand for refined products. Another issue facing European refiners is the competition from the massive new refineries in India and Saudi Arabia.
A report in The Wall Street Journal notes that about 19% of Europe’s refining capacity (3.4 million barrels/d) could close by 2020. Globally, surplus refining capacity could expand to 3.4 million b/d by the end of this year. As prices for refined products spiked in 2008, more refining capacity was added and the subsequent fall in the global economy reduced demand just as the new capacity was coming online. By the end of this year, more than 2.2 million b/d of refining capacity will have been added in Asia and the Middle East in 2009 and 2010 alone.
Oddly, the European refiners are not likely to close the underperforming assets because European governments and unions make a terrible fuss about losing jobs. The governments, of course, don’t want to be seen as complicit in wiping out jobs in the middle of a recession, and the unions never want to lose jobs and the dues-paying members that go along with those jobs.
Another factor militating against closing money-losing refineries is the high cost of cleaning up the refinery site. Environmental remediation is far more expensive than just paying the workers and keeping the refinery in minimal operation.
The US imports about 1.1 million b/d of gasoline from Europe, primarily in the northeastern states. The US has long been a preferred destination for European refined products exports because prices are generally higher in the US and the opportunity for traders to arbitrage is greater.
But if many European refineries are barely staying open, as crude prices fall the opportunity arises for the refiners to increase production for export to the US. That assumes that US demand grows, which it may do yet this summer. The lower crude prices make European refined products more competitive in the US.
Summer demand has not yet picked up in the US, but if it does and the European refiners want to compete with US domestic refiners, they probably could do so. After all, they’re already losing money and the worst they might do is lose less by refining more for export.
