In June of 2009 an article entitled “A Tsunami of Change Bearing Down on the Refining Industry” published by Roger Ihne of Deloitte, he warned that the US refining industry could be in for an extended period of overcapacity, low margins and utilization rates, and resultant low profitability. He pointed to the recent decrease in domestic gasoline consumption that accompanied the 2008 price spike (to $150 bbl and $4 gal gasoline) and the financial crisis driven economic recession as evidence that Americans could reduce their fuel habit at a much faster rate than previously imagined.
Ihne also foresees a number of government mandates as further facilitating the downward trend in gasoline demand. These included 1) Accelerated requirements for more fuel efficient vehicles 2) Mandated use of biofuels 3) A carbon emissions reduction system (i.e. Cap and Trade) that will increase refined gasoline cost and thus further reduce demand.
The end result of rising gasoline prices and government mandates aiming to curb oil demand and promote biofuels and other renewables is forecast to result in 2030 gasoline demand that is down 13% from current levels. Over this 20 year period Ihne predicted US refining utilization rates in the low 80% range and the current trend seems to be moving in his direction (see chart below).
On the other side of the refining debate is EOR Energy Resources CEO Richard Chimblo who published a rebutal in the Oil and Gas Journal that argued that additional capacity will be needed over the next few decades. He particularly challenges that assumption that biofuels will grow to a meaningful percentage of US fuel transport consumption because unsubsidized the industry remains “neither efficient nor economical”. The energy invested for energy gained math indeed does not seem to add up for domestic corn based ethanol and distribution would require a whole new pipe system since ethanol can not use the same transmission pipes as gas or oil.He further argues global demand for refined gasoline should be increasing rapidly over this period as the supply of light crude oils is decreasing. Therefore there is an opportunity for refineries able to process tar sand bitumen and other heavy oils, most of the reserves of which happened to be located in the western hemisphere.
My take on the debate is that much of the outcome hinges on the US governments stance on carbon emission legislation. Under a regime where intensive heavy oil processing becomes uneconomical due to its intensive carbon footprint, the US refining industry will certainly contract. However, if technology or more accommodating carbon legislation allow investment in new refineries capable of meeting gasoline demand even after the days of light sweet crude there may be an opportunity for America to lead a new phase in the history of transport fuel refining.