Here is one more thing for those of us who live in the northeastern U.S. to start worrying about - the refineries that make our gasoline, diesel, heating oil, etc. are dropping like flies.
In today's economy, these refineries are simply losing so much money that their owners who are not major oil companies that make billions from oil production are having put them up for sale or close them down. In recent years we lost refineries in Westville, NJ, and Yorktown, Va. A large refinery in southeastern Pennsylvania was shut down in December as was one in New Jersey. A third large Philadelphia refinery is up for sale and will be closed in July if no buyer can be found.
Last week we learned that what once was one of the largest refineries in the world (500,000 barrels a day [b/d]), located in the US Virgin Islands and which has been shipping about 200,000 b/d to the U.S.'s east coast will close next month. If you add up the rated capacities of refineries being closed you are looking at something approaching 1.5 million b/d, but as these refineries were not running at capacity or sending their entire product to the northeastern U.S., we are losing more on the order of 800,000 b/d of daily production. If this is not enough several European refineries, another source for gasoline in the U.S., have recently closed down or are up for sale.
Leaving out the 200,000 b/d of oil products that has been coming from the Virgin Islands, the three big Philadelphia area refineries were producing about 40 percent of the gasoline and 60 percent of the diesel being consumed in the northeast. Making up for a loss of this size is likely to take some doing. The EIA is already warning of higher prices in the area and the possibility of spot shortages as the logistics of keeping the northeast supplied with liquid fuels is becoming far more complicated.
Some of the loss in refining capacity can be made up by increasing production at the remaining refineries in the northeast, increasing the amount of ethanol in gasoline, or trying to push more oil through the pipelines from the Gulf Coast refineries. These pipelines, however, are already moving about 2.5 million b/d which is close to max capacity.
The only real solution to getting large amounts of finished petroleum products to the northeast is by water from the Gulf Coast refineries, Europe, or beyond. The EIA says there is enough capacity to bring additional quantities of petroleum products into NY harbor, but the Philadelphia area presents a problem for the port facilities are set up to unload crude for refineries and would have to be reworked to take in oil products for distribution. As the facilities are up for sale, little can be done until the ownership of the undocking facilities is settled.
Another problem in all this is the Jones Act which requires that all products being moved from one U.S. port to another be transported in U.S. built, owned, manned, and flagged ships. As there are not many tankers meeting these criteria, finding adequate transport may be hard to find. Shipping oil products from abroad is not a problem, and about 500,000 b/d of gasoline, besides that coming from the Virgin Islands, is already coming into the ports on the U.S.'s east coast. While most is coming from Europe, some is coming from as far away as India which is already sending us 40,000 b/d.
Replacing the lost supply of refined gasoline may not be too much of a problem, but the distillates -- diesel and heating oil --may be another problem. As the EU has been switching to diesel from gasoline in recent years, the continent has had a surplus of gasoline that refiners have been happy to sell to the U.S., but diesel is in tight supply around the world, and very little is imported into the U.S., mostly from dedicated refineries in Canada. Attracting adequate supplies of diesel and heating oil to East Coast markets in the future is likely to require a hefty price premium or there will be shortages.
While it is always possible that somebody will come along, buy the unprofitable refineries, and make a go of operating them, given the general state of the US economy with the steady reduction in the demand for oil products, this does not seem likely. The impact from the shuttered refineries will be felt first through increases in gas prices along the East Coast, particularly north of Washington. There are already hints that such a price increase in underway. For years my neighborhood gas station has always sold its regular for within a penny or two of the national average which for the last week has been around $3.38 per gallon. My neighborhood station, however, is currently posting $3.60 or nearly 22 cents above the range where it has traditionally sold. While this unusual spread could be a temporary aberration, it could also be a harbinger of things to come. In New York and Connecticut, relatively high gasoline tax northeastern states, regular gasoline is now selling for $3.68 with is only 3 cents below California, the traditional price leader in the lower 48.
When refinery closings come together with the traditional winter-spring increase in gasoline prices we could be looking at some never-before-seen gasoline prices in the $4-5 a gallon range before the year is out. Five dollar gasoline means diesel could be well north of $5 when the effect of the global diesel shortage is considered. This will certainly not do much for economic recovery later this year and would certainly roil the political pot. Alternatively, the EU may encounter such serious problems later this year that gasoline prices will go down.
Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.