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US refining: new again – part four

Hydrocarbon Engineering,

The outlook

The US refining industry has faced a number of major challenges in past decades, including:

  • Periods of overcapacity and poor or negative margins.
  • Changes in crude feedstock types, sources, and prices.
  • International refinery expansion programmes and expansion of export refining.
  • Successive waves of fuel specification changes, both home and abroad.
  • Mergers, acquisitions, and a retreat from vertical integration.
  • The shift to 10% ethanol blends and the transfer of gasoline finalisation to blenders.
  • The influx of light tight oils from shale plays in the center of the country.

Now, more change is on the horizon. Some of the critical questions facing the industry are:

  • How low will global crude prices go, and for how long?
  • Will low crude prices internationally erode the feedstock cost advantage recently enjoyed by many US refineries?
  • What will the impact be on demand?
  • Will low prices shut in domestic production and derail progress in alternative and renewable energy sources, and if so, will this pave the way for another oil price shock?
  • Conversely, if advances in alternative energy continue to be made, and/or if carbon taxes are adopted, will the US shift more quickly away from fossil energy?
  • Will the US move toward 15% ethanol blends, cutting further into demand for oil based gasoline?
  • Will the US relax its restrictions on exports of crude oil, removing what critics call a form of protectionism?
  • Can the US remain a competitive export refining centre in the Western Hemisphere and further afield?


US refiners have weathered many a storm, and they are not to be underestimated. Capacity and the number of participants have been carved down, and the remaining group is highly sophisticated. Fuel quality is exceptional, and the industry is famous for producing large yields of high value transport fuels from difficult feedstocks. Additional quantities of domestic feedstock are being more efficiently allocated across the country. The phasing in of 10% ethanol into the gasoline pool has been accomplished. And the US has established itself as a major exporter. Yet as such, US refiners are much more exposed to the vagaries of international markets. Given past history, the US refining industry is at least on a par with any other industry in the world, but in the future, it will be able to rely less on the domestic market.

In the 1980s, demand was below operable and operating refinery capacity. Gradually, the gap between operable and operating capacity began to narrow as unused refineries were closed. During the 1990s and into the 2000s, demand was above operable and operating capacity, and the gap between operable and operating capacity was very small. But demand dropped sharply below capacity after 2008. The gap between operable and operating refinery capacity has widened.

Today, the incremental refinery in the US is being run solely for the export market. This has been made possible chiefly because of the influx of domestic crudes, the restrictions on their export, and the wide differential between US crude prices and international crude prices. It also has been possible because export markets, chiefly in the Americas, have continued to see oil demand growth without a commensurate increase in refining. The coming year could bring changes to any one of those factors, or all of them at once. The recent uptick in US demand has been more or less mirrored by an increase in refining, but a sustained increase in US oil demand is not to be expected. As a final note of caution, therefore, if US demand remains low, and the export market grows more competitive, the more likely outcome is that the gap between operable and operating capacity will narrow, and that both will subside.

Written by Nancy Yamaguchi. This is an abridged article from Hydrocarbon Engineering’s March 2015 issue.

Read part three of this article here.

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