Refinery Problems Threaten Fuel Oil Industry

Aug. 1, 2001
PREDICTING market situations for the fuel oil industry these days is pretty much a wait-and-see proposition, according to information presented during

PREDICTING market situations for the fuel oil industry these days is pretty much a wait-and-see proposition, according to information presented during the New England Fuel Institute (NEFI) Convention June 13-14 in Boston, Massachusetts.

While the just-ended crude oil export embargo by Iraq and the uncertainty of actions by other members of the Organization of Petroleum Exporting Countries (OPEC) has snagged headlines, the problem with refineries is a significant hurdle for the fuel oil market, said John Felmy, chief economist, American Petroleum Institute. Also commenting on the current situation was Terry Higgins, technical section, National Petrochemical & Refiners Association.

OPEC, which decided July 3 to maintain its present output levels without change, could easily fill the crude oil gap caused by an oil embargo, as Iraq imposed earlier this summer. According to information from OPEC, the cartel is committed to continuing to monitor the market and to take measures, when deemed necessary, to maintain prices within the range of $22 to $28 per barrel. Saudi Arabian Oil Minister Ali al-Naimi has said that OPEC will ensure there is no supply shortage.

However, many refineries currently operating in the United States are becoming obsolete and will have to be replaced. One-half of the refineries that were operating in the United States have been shutdown over the last 25 years, Felmy said. Furthermore, replacement is fraught with financial difficulties because of the huge capital investment that will be required.

For the time being, however, refineries produce enough gasoline and distillate supply to stay with or above demand. During the early summer, refineries were running at record capacity, 95% for the seven weeks preceding the NEFI meeting. “That is a record for nine weeks in a row,” he said.

The downside for the fuel oil industry is that more than the majority of the production goes to gasoline. At the same time, an all-time record, 3.7 million barrels of distillate, was produced in the week of June 4.

Distillate inventories are higher than they were this time last year, but they were particularly low last year. “Things are better, but they aren't great,” Felmy said.

Of the 24% refinery production for distillates, one-third goes to high-sulfur fuel oil, and two-thirds goes to low-sulfur diesel. The competition between fuel oil and diesel production makes a Catch-22 situation for the fuel oil dealers that require diesel to power their vehicles, yet need the fuel oil to supply customers.

“There are no magic solutions,” said Higgins. “These problems have developed over a long time. Fixes will require long-term measures.”

The May 17, 2001, White House energy policy recommendations should help to ease the situation, he said. Recommendations included calls for expanding and diversifying supplies, recognition of impediments in refinery expansion, and a call for streamlining refinery permitting.

“In general, that was a very positive move,” Higgins said.

Felmy noted that the energy debate in Washington has become politically polarized, which indicates further problems for reaching decisions that are critical to production. The United States must have a balanced energy policy, one with a clean environment, he said.