This morning Mark Haines asked a UK reporter about refining capacity and its effect on oil prices. His point was that less refining should lead to less oil being consumed so the price should go down. More refining means more oil will be consumed so the price should go up and no one had an answer.
It seems to me that if less oil can be refined, the product becomes more scarce for end use. The price goes up.
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7 comments:
Hi Roger,
From your brief snippet, it seems as though the UK reporter had the following thought process.
100 units of oil available from all sources (OPEC and non-Opec sources). If refining capacity can only process 80 Units of Oil, then the price of oil will go down because there is a glut of oil that cannot be refined. Unrefined oil is useless unless you are paving roads.
If there is a 120 units of refining capacity, 120 units of demand by end users (industry and household consumers) and only a 100 unit of oil supply, then oil prices will go higher because at the present prices there is more demand than supply.
As I read your answer, I believe you are saying that if refining capacity is tight, then end-users will pay more for the refined products that are available.
I don't know how out of sync oil production is with refining capacity. My simple thoughts are that as the refiners make more profits they can afford to pay more for better crudes. Refiners will purchases those crudes that are most valuable--that is light, sweet crudes, which are good for making gasoline and jet-fuel. Heavier crudes might be more discounted as refineries can't process all the crude anyway. So they are maximizing their profits.
And if you look at an engineering company in Calgary called Sproule Associates, they show that the heavy oil differential prices are very wide now compared to historical norms. That is probably the result of more Canadian oilsands supply and a lack of refining capacity in North America to accomodate heavier crudes.
Not sure if any of this helps, but those are my thoughts for what they are worth.
Best regards,
Kevin
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Hi,
Before I begin, I should clearly highight that I am not an expert in refinery related topics--not even close. I hope someone who works in the refining industry comments, because their contribution will be much more signficant than mine. I do have experience in the Canadian oilsands sector and some tangential experience to the refining side. But as far as refining is concerned, I would much prefer to defer to others with more knowledge.
I did some hunting and poking around on the Internet. From my brief review, it seems that Saudi Arabia's oil portfolio is shifting toward heavier crudes. As long as there is a lack of conversion capacity worldwide, the Saudi's are in a difficult position because their heavier crudes are heavily discounted, much like Canadian oilsands heavy crude is heavily discounted. Thus the lack of refining capacity (and/or conversion capacity) is making it more difficult for others to supply crude because much of the "surplus" or "extra capacity" crude is heavy. Thus, a lack of refining capacity (and/or conversion capacity) is leading to higher prices oil prices as well as high gas pump prices. And for the Saudi's, a substantial heavy oil discount means less cash for their oil.
As far as the US is concerned, Venezuelan crude is typically heavy and Canadian oilsands crude is heavy. Both "countries" secure refineries so that they can place their crudes into the US. Finding "refinery" homes or building upgraders for heavy crudes is a large challenge for the Canadian oilsands producers.
Here are two links that might prove helpful: Crude Awakening: Are Saudi Reserves Drying Up? and The refining industry is likely to witness major expansions.
Again, I encourage others that are more knowledgeable than I am on this topic to correct, add to, or clarify what I have written.
Hope this helps.
Best regards,
Kevin
Kevin
Thanks for all the detail!
What apparently causes the rapid rise in the price of oil are the political and not the economical reasons. The location of the OPEC countries and their undemocratic governments are a cause of great concern in the West. Saudia Arabia as a major supplier of the US is particularly vulnurable to serious unrest in the near future in my opinion. This could cause much difficulty to the US and the rest of the world.
I remember back in 1996 or 1997, Time Magazine had a cover story outlining the Saudi family's concern about running out of oil.
Larry Nusbaum
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