Refining shortfall threatens to drive prices up
Reuters
London: A lack of refining capacity that has plagued US energy supply since the turn of the decade is now becoming a global phenomenon, threatening to drive oil price strength in years to come, analysts say.
This is a dramatic shift from just two years ago when companies were exiting the refining sector due to poor profits.
Now, surging US and Chinese fuel demand and the failure to build or significantly upgrade plants in past decades are making the fuel supply picture extremely tight, leaving refineries less able to respond to disruptions like strikes or fires and increasing the risk of fuel price spikes. Soaring product prices are in turn helping drive crude futures.
"The oil market is on a knife-edge because global refining capacity is completely overstretched - the key is not crude but refined products," said Sempra Energy consultant Geoff Pyne. "The equation changed after China emerged as a huge buyer."
Demand for motor, aviation and heating fuels has skyrocketed in the past two years as China has stepped in to buy vast quantities of oil products, sucking up Asia's spare refining capacity as well as imports from Europe and the Middle East.
Consultancy PFC Energy expects global product demand to exceed refining capacity by 1.4 million barrels per day (bpd) by end-2004. In contrast, capacity exceeded demand by 5.7 million bpd just five years ago, it said.
"A decade ago there was enough headroom to cope with unexpected supply and demand shocks," Barclays Capital analyst Kevin Norrish wrote. "Today there is no chance of being able to cope with a significant shock without a severe price response."
For instance, a March fire at a Texas refinery sent US gasoline futures to an all-time high within minutes.
Opec says high US gasoline prices boil down simply to a shortage of refining capacity. "There has not been a refinery built in America in the last 20 years. So if you produce more crude but you can't refine it, it's not going to translate into gasoline," Saudi Arabian foreign affairs adviser Adel Al Jubeir said recently.
The West's energy watchdog, the International Energy Agency (IEA) says global refining capacity must rise by 1.3 per cent a year for oil product supply to keep pace with demand growth.
It predicts demand at 114 million bpd by 2030, requiring refining capacity of 121 million bpd - 50 per cent up on current levels.
But building new plants, or even adding capacity at existing refineries takes years and costs billions of dollars. Lack of investment has actually cut capacity in the United States by two million bpd over the past 20 years to 16 million bpd.
The US Department of Energy (DOE) projects that refined products' share in net petroleum imports could double by 2025.
"More imports would be needed as the projected growth in demand for refined products exceeds the expansion of domestic refining capacity," the DOE said in a report this year.
US gasoline markets rely on imports from Europe but Asian growth has sparked an east-west tug-of-war for barrels, since much Asian refining capacity shut down after the 1998 economic collapse and is yet to be restored.
Quelle: Gulf News
