Quote:
Originally posted by cmccuist
One other thing to consider - refining capacity in the US is maxed out. There are no new refineries being built and existing refineries are being run at near 100%. In addition, any money being spent at these US refineries is being spent on upgrading existing units to conform to environmental regulations rather than increasing capcity.
What I meant by $55/bbl not getting anyone's attention is we're still climbing into our Hummers and Escalades and F250's and Hemi P/U's. There are the greens driving their hybrids, but not in significant numbers. I'm fine with all that - to each his own, but we're not going to see any development in new energy sources until oil is REALLY hard to get out of the ground.
GO Astros!
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But the question is
why is refining capacity maxed out?
The major US oil companies are rolling in profits. For example, Exxon-Mobil (ticker XOM) is reporting pretax margins >14%, after being stuck in a 6-10% range for all of the '80s and '90s, and its revenue and EPS are hitting new records. The oil companies have all the money they need to build new refineries, update new ones, etc. With $10 billion of cash on the balance sheet and $15 billion of free cash flow in 2003 (heading higher in 2004) XOM can hardly pretend it is too poor to build a refinery or three. Similarly for the other majors.
Environmental regulations are not a barrier. They may be a nuisance from the oil companies' point of view, but they have the most cooperative EPA they could possibly hope for under this Administration. Do you seriously think Exxon-Mobil couldn't use its friends in the White House to smooth out any regulatory obstacles?
I see two possible reasons why refinery capacity is not being added.
First, the oil companies may not believe that $55/bbl oil will last, and are reluctant to start long-term projects that won't be as profitable under $35/bbl oil.
Second, the oil companies may have calculated that their profits and return on capital will be higher with less refining capacity. Tight refining capacity contributes to high fuel prices and high crack spreads. Crack spreads (difference between crude and refined product) have risen from the 2.0-3.5% range in 1999 to the 6.5-7.0% range today and were as high as 12% earlier in 2004. This is great for oil company profits.