2008 - A Great Year for Holidays

By Preston Bemis

Everyone is concerned about the prevailing cost of energy. Gasoline and diesel fuel consumer prices are at historic highs. Many people are downsizing their cars and some are avoiding travel completely. But perhaps 2008 is a good year to take that long-delayed vacation.

There are many indications that petroleum supplies will become even tighter next year. One research group(1) found that refinery maintenance will increase several-fold in 2009. Turnarounds have been postponed due to the tight labor market and the recent trend in strong profit margins in the industry. This year, 257 process units are scheduled for maintenance downtime, with 1282 units planned next year. Coupled with industry multi-billion dollar budgets to execute a large number of refining improvement, expansion, upgrading and clean fuels projects, the available work force appears inadequate. Downtime is likely to be extended; in fact, Marathon Oil(2) “sees refining downtime lingering longer”, with US refining capacity utilization running at 82.4% in April, well below the 90% + achievable in the past.

The rest of the world is also worried about supply. Setting aside dislocations caused by civil unrest, war, or territorial disputes, the Wall Street Journal reports a net export decline, saying “fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world's top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year as well.” (3)

The Journal also says that last year, the Middle East's six largest petroleum exporters – Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar – curbed their output by 544,000 barrels a day. At the same time, their domestic demand increased by 318,000 barrels a day, leading to a loss in net exports of 862,000 barrels a day.

OK – Enough ‘Facts’

The US will continue to be heavily dependent on oil as we all recognize; increasing our use of coal for power production appears to have run into environmental, cost, and political barriers. And NIMBY reigns supreme when nuclear plants are discussed – although recent permitting activity may indicate changing public and governmental attitudes. We don’t want LNG terminals on our shoreline either, and windmills don’t seem sturdy enough for Katrina-force winds. Biofuels might hold promise someday if we don’t first starve ourselves, our livestock, and our water supplies trying to get there. And there is also that annoying competition from developing nations for their fair share of the world’s dwindling oil supplies.

Much of the refining construction activity in the USA is building new conversion or desulfurization units, and several projects are increasing crude throughput. No new refineries have been built since the Garyville, LA refinery was commissioned in 1976, in part because of government red tape and environmentalists. High construction costs as compared with Asia or the Mid-East, and poor margins would not make a new refinery particularly profitable. Our refining facilities are getting older, but with improved maintenance and technology have become very reliable and safe. However, there comes a time when the inspection reports cannot be ignored and process units must be repaired.

So What?

Energy costs next year are likely to be much higher than those today, so take your holiday now. The USA enjoys relatively cheap gasoline and diesel. In Europe, we are paying as much as $9.50 per gallon of gasoline – although about 68% of that is government tax. In the USA, the politically correct tax is a bargain at $0.48, or about 12% of the cost of a gallon. No wonder why our transportation infrastructure isn’t the best in the world! My old 1999 Audi diesel gets 38 mpg average driving in England – a similar engine power new Dodge Caliber driven from Columbus, OH to Atlanta, GA recently gave me 28 mpg on the highway. My 1995 Mercury with lots of V-8 horsepower gets 24 mpg on such a trip. Madison Avenue (and Detroit) should be ashamed.

Considering expected longer duration refinery outages, lower import finished product supply availability, and the continuing increase in energy demand, oil prices will continue to rise. You might see gasoline pump prices above $6 per gallon next year, even if the US government doesn’t get smart by raising the tax (political suicide, thus highly unlikely). Transportation costs will climb, with offsetting consumer price increases in all sectors.

As Martha Stewart might say, ‘It is a good thing that China is manufacturing most of our household products using cheap labor and coal-based electricity, otherwise we wouldn’t have the energy to do it ourselves.’

These are just some of my thoughts – debate, disagreement, and provocative outright name calling accepted. I have many more ideas and thoughts on our energy situation. There are also certainly many ways that Carmagen Engineering can help refineries improve their reliability and profitability. Let me know if you are interested.

(1) Industrial Info Resources, as reported in Hydrocarbon Processing, March 2008, page 21 (www.industrialinfo.com)
(2) Hydrocarbon Processing, May 2008, page 7
(3) Wall Street Journal, as reported by Finfacts Ireland, February 2008 (http://finfacts.ie/irishfinancenews/article_1012573.shtml)