Nowadays, economic growth is bonded with the oil industry through petroleum refineries and petrochemical plants. Since this bond recently become a usual headline for debates, it is crucial to the oil industry to globally contain such update in the economical growth. The issue of petroleum refineries and its capability is one of several strategies appointed by energy companies to play a major role in the oil market scenario recently.
When confusion appeared on the faces of the observers to the oil market over reasons behind boosting oil prices, the temporary response was an increase drive to speculation on paper barrels (trade on oil commodity on stock market). This temporary response did not last that long enough due to the over curiosity spoiled in oil market lately. A step further, the analysts claimed the shortage on oil supply because of the usual suspect, OPEC, ceiling production policy. Nevertheless, OPEC reacted to the oil market concerns and shifted the ceiling upward with 500,000 barrels a day. However, another claim blaming OPEC was sooner than expected.
The refineries capacity story started in 2003 but never reached the public until the interview with the then Saudi ambassador to Washington, Prince Bandar ibn Sultan, on “Meet the Press” where he mentioned the refineries capacity as the prime factor behind increase in gasoline prices on American consumers.
Accordingly, the demand on refined products was not the criterion in what is noticed in the oil market today. However, restraining supply and eliminating the abundant refined capacity, which was depreciation reserve to face circumstances and variables of the seasonal market demand, are the two tangents to the oil prices scenario. This selected approach is common in economics vocabulary.
Since no measure is available to encounter demand on any commodity, the only economical mean on hand is to control refined products supply and plotting production to the line of daily demand even with rough operational conditions. And while OPEC reduced oil production to obtain equitable returns, American energy firms devoted their potential efforts to find another efficacious factor, refinery production, to remain one of the decision makers to the market of the largest economy in the globe.
In spite of the circumstances behind such approach, there was an obvious effect on the inventory capability to the refined products where it might vanish with the incrementing demand. Moreover, American Petroleum Institute reported that with no such inventory capacity, any upset in the pipeline or delays can result in a shortfall of product in the market. With such shortfall, price hike is expected in truck stops and gasoline stations.
This issue was pointed out on one of the United States Senate subcommittee on investigation on gasoline prices in May 2001. Senator Carl Levin stated on that hearing: “In areas of high concentration where a few refiners control most of the retail sales by keeping supplies tight, refiners can raise the price of gasoline without great fear of competition.
One way to maintain a tight supply is keeping only a minimal amount of gasoline in inventory. One effect of doing that is that any supply disruption will cause a shortage of gasoline because there is no reserve capacity to bring to market. This invariably leads to price increases, and, because gasoline is such an essential commodity in our lives today, most Americans have no choice but to pay more and more when prices rise.”
In NPRA, National Petroleum Refinery Association, Annual Meeting March 2005 Joanne Shore mentioned that there is a gap between heavy crude oil and light crude oil prices. This forced the oil companies to refine the heavy crude oil even if the conversion is low resulting in limited refined products in the market. Also, it is vital to notice that with such high oil prices it is feasible to produce heavy oil prices since the revenue far passed the cost of exploration of the heavy crude fields.
Oftentimes, petroleum refineries settled as unfortunate industry that existed to serve the crude oil market. Nonetheless, the last five years indicate that petroleum refiners become an effective variable in the oil market equation. After the financial statements shown considerable profits in the previous years, Economists begin to withdraw the appeal for reevaluating the economical feasibility of investment in the refinery industry by oil exporters. Whatever the losses may be or profit corrosion appeared in the investment of refinery industry in the past, the matter still the surety of the oil exports and the control in the new variable, petroleum refinery, that touched the equation of the oil market. Until the last drop of oil, refinery industry will play a major role to attain the just price for exhausted commodity.
(Tariq Qais Alsuqair is an energy economics analyst.)