0306AgvisorsMRsr.cfm Refining capacity affects gas prices
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Refining capacity affects gas prices

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By Agvisors LLC

Last week we discussed the implication of federal, state and local taxes on the price of a gallon of gasoline. This week we are going to cover how constrictions, or potential constrictions, in refining capacity will affect gasoline prices. A prime example of how supply and demand drive prices is taking place in the northeast United States. The media continues to drive the point home that we have an excess of crude oil and therefore the price of gas should be much lower. We agree that there is an ample supply of WTI crude to meet demands for that product. The increase in price for crude is driven by global demand and pricing and cannot easily be changed.

Gasoline is a bit of a different beast in that it is best refined close to its end customers or as an alternative can be shipped by tankers. Therefore refining capacity and location are key components to the supply side of the pricing equation. Slowly and quietly there has been a constriction of gasoline refining capacity taking place in the northeast United States. In February 2010 Sunoco closed its Eagle Point/Westville, N.J., refinery with total daily refining capacity of 145,000 barrels. September of 2011 brought another closure at the Western Refining Yorktown, Va., facility that processed 66,300 barrels of oil a day. The total capacity removed from the market equaled 211,300 barrels of oil a day. A large portion of this loss was replaced by the PBF Energy Co. LLC's Delaware City Refinery being brought back on line after being shut down in 2009. This facility replaced 182,000 of the 211,300 barrels lost in the closing of the two refineries.

The next marked decline in refining capacity took place in September and December of 2011 as Sunoco Inc. and ConocoPhillips idled two refineries in Pennsylvania and put them up for sale. The total capacity of the two facilities was 363,000 barrels of daily refining. Sunoco has also announced that unless a buyer is located for its Philadelphia refinery it will be closed around July of this year. It has a daily running capacity of 335,000 barrels of oil a day. When you add up the two idled facilities and a potential closure of the third you come up with 698,000 barrels of refining capacity taken off line. To add insult to injury a refinery that shipped almost half of its daily production to the northeast announced it will shut down the 350,000-barrel-a-day refinery and convert it to a storage facility.

If the large Sunoco refinery does close, it will present some fairly large logistical challenges in transporting fuel to the various regions of the northeast. Many of the pipelines that carry fuel to various locations in the northeast originate at the facility, the largest refinery in the region. Access to the pipeline will have to be reworked to allow for other points of entry to the system. This will most likely cause local shortfalls in supply.

One option to help curb the supply issue would be to transport refined products from refineries located in other parts of the United States--specifically the Gulf Coast area, which has some but not a lot of excess capacity. There is one logistical issue associated with this that would take some time to correct. For the refined products to be shipped by tanker to the northeast for delivery all tankers must comply with the Jones Act. The statute that regulates this is as follows: The Merchant Marine Act of 1920 (P.L. 66-261) is a U.S. federal statute that regulates maritime commerce in U.S. waters and between U.S. ports. Section 27 of the statute, also known as the Jones Act, requires that all commercial shipping between U.S. ports, cabotage, must be performed by U.S.-flag ships constructed in the United States, wholly owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. Steep penalties result from noncompliance. At the end of 2010, 56 tankers met the Jones Act requirements, accounting for less than 1 percent of both the total number and the total deadweight tonnage of tankers in the world. At any given time, 35 Jones Act tankers are engaged in trade in U.S. waters.

This regulation places a tremendous constriction on the ability of Gulf Coast refineries to deliver needed refined products to high-demand regions of the United States. When you add on increasing regulations on refining operations, it will also motivate refiners to leave that space in pursuit of other sources of profitable means.

We want to thank the U.S. Energy Information Administration for provided data for this article.

Editor's note: Agvisors provides commentary about agricultural markets, including grain, dairy, livestock, equities, financials, and energy, highlighted by a live weekly webinar discussing conditions and responding to questions. For more information, visit http://agvisors.com.



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