THE PETROLEUM REFINING INDUSTRY: PERSPECTIVE

Firms in the petroleum refining

industry include those engaged in producing

gasoline, kerosene, distillate fuel oils, residual

fuel oils, lubricants, jet fuel, etc.. These

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Value of Industry Shipments

(Billions of Dollars)

products are produced through fractionation or straight distillation of crude oil, redistillation of unfinished petroleum derivatives, cracking, or other processes. The value of industry shipments in 1994 was over $153 billion, or 4.6 percent of the total of all industry shipments. From 1992 to 1995, this industry, which constitutes 2.7 percent of consumption expenditures, experienced an average growth rate of 1.9 percent, compared Source: Energy Information Administration to the all-industry average of 4.2 percent. The petroleum refining industry is fairly

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1990

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1993

1994

concentrated, with the largest 8 companies accounting for 49 percent of the value of shipments.

Compared to the manufacturing average of 12 thousand British thermal units (btus) of energy used per dollar of value added, the petroleum refining industry is among the most energyintensive of the major industries, using 146 quadrillion btus per dollar of output. Byproduct energy sources such as still gas and petroleum coke are still the predominant fuels, with natural gas following.

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International Trade

The petroleum refining industry is a net importer. In 1993, imports of petroleum products were $11.7 billion (or 2 percent of the total of $589.4 billion), while exports were $5.5 billion (or 1.2 percent of the total of $456.8 billion). Imports to the U.S. now come primarily from Algeria, Canada, and Venezuela, and exports generally go to Mexico, Japan, and Korea. It is estimated that more than 20 percent of the refining firms in the U.S. are foreign-owned, representing almost 30 percent of the crude distillation capacity.

Investment and Employment

New capital expenditures in the refining industry were about $5.2 billion in 1994, or 4.7 percent of all new capital investment for the manufacturing sectors. Of this total, $4.4 billion was for machinery and equipment and $0.8 billion for buildings and structures. In addition, $11.8 million was spent on used capital. $28.3 million for buildings and $83.5 million for machinery and equipment.

Of the total of approximately 123 million civilians employed in the U.S. in 1994, 18.3 million were employed in manufacturing. A total of 72,000 were employed in refining, with almost two-thirds of them, or 46,600 of the 1994 employees, categorized as production workers. As recently as 1981 total refining employment exceeded 170,000.

SUMMARY OF PETROLEUM REFINING SECTOR

1. SUMMARY OF MARTIN TALLETT'S PAPER

Overview

Martin Tallett concluded that the impact of the assumed fuel price adders on the global refinery industry would be "substantial, adverse, and complex with possibly unintended consequences." The impact of the assumed price effects depends on whether they apply only to refinery use of fuels or if they would also be applied to refinery products.

● If the add factors were levied against refinery products, the demand for these products would decline substantially and so would refinery revenues and new investments.

•If the add factors were levied against refinery fuel inputs in OECD countries, the refineries in these countries would become non-competitive with refineries in non-OECD regions that were unaffected by the policy.

Tallett defines the impact as follows:

Domestic OECD refining would be subject to near elimination but global GHG
emissions ex refineries and associated shipping probably would not decline. Some
minor segments of U.S. and OECD refining may remain, e.g., those in highly
interior regions with local crude supplies or, possibly, those refineries whose
production was focused on high-value non-fuel products.

The substantial and adverse impact that results in refineries becoming non-competitive occurs because:

the assumed fuel price adders would impose a significant increase in the operating costs of refineries;

⚫refineries have a low rate of return on investment;

●refineries have no effective means to avoid the cost increases; and

⚫competing refineries in non-affected countries would not be subject to these cost increases.

The application of the price adders to refined petroleum products implies that refineries in non-affected countries would bear part of the cost. To the extent that such refineries sell products in participating countries, these refineries would experience a decrease in demand and a

resulting decline in revenues. Refineries located in participating countries would experience a similar decrease in the demand for their product plus an increase in operating costs due to the fuel price adders.

A complexity results from the assumption about future transportation costs, and particularly whether they are affected by the assumed fuel price adders. Tallett stated that the effect of the fuel price adders on transportation costs can be roughly similar to the increase in refinery operating costs. Fuel price adders applied only to selected countries would encourage capital movements to non-participating countries and an increase in world trade flows of crude and refined products. However, an increase in transportation costs could offset this outcome.

An unintended consequence emphasized by Tallett is the conflict between refinery emissions and policies intending to achieve environmental quality. Environmental quality is improved by substituting environmentally enhanced fuels for less clean fuels. However, cleaner fuels require more intensive refining, which results in an increase in refinery emissions. If fuel price adders were higher for carbon intensive refined products (for environmental reasons), then refined products would have to be upgraded. Refinery fuel consumption and GHG emissions would thereby increase.

To note some of Tallett's other conclusions:

●The U.S. refinery sector relies significantly on natural gas in the refining process. There is therefore little opportunity to improve emissions by switching to fuels with lower carbon emissions. There will be more of an opportunity to switch fuels in Europe as the natural gas network of that region becomes more highly developed.

●Major breakthroughs in refinery technology are possible and would enable the refinery processes to operate at lower temperatures and atmospheric pressures. Such breakthroughs would be of major importance in reducing energy use in refinery operations. This type of innovation would not be encouraged by policies like fuel price adders since declining return on refinery investment would leave less revenues available to undertake environmental improvements.

●Within the U.S., all refinery regions would be affected, but the large "swing" refinery business of the U.S. Gulf Coast would be most affected.

●Any possible gain in refinery employment in a base case would be reversed by imposition of the fuel price adders.

⚫Under a business as usual strategy, the share of oil imported to the U.S. rises from 50 percent today to 57 percent by the year 2010. Any policy action that adversely affects the