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Irving Oil Ltd. and their partner BP PLC have decided to stop their planned construction of an $8B oil refinery that was to have been built in St. John, and they have done so on the basis of a report that looking out over the next thirty years, oil consumption has now peaked. There are now a number of analysts that believe that even if the economy recovers, gasoline consumption peaked last year, and we will never achieve those levels again.
Some analysts are suggesting that with the economy still tanking and excess inventory of gasoline and other refined products piling up (there's a million barrels per day of production capacity sitting idle in North America at the moment, and surplus inventory has hit a 24-year high), crude oil prices can be expected to tank—possibly as low as $20/barrel.
So even though refiners have seen their margins rising to a ten-year high (according to numbers released by MJ Ervin and Assoc. in 1998 refiners were seeing an annual average margin of 6.7¢/litre which has risen to a year-to-date average of 15.6¢/litre this year), they are not planning any more production capacity and are, in fact, abandoning planned expansion. Plans such as Royal Dutch Shell's now abandoned plans for a refinery near Sarnia, Ont., that was to handle production from the Alberta oil sands. Shell has also delayed the expansion of its Texas plant for two years—obviously wanting a better read on future North American consumption patterns before building what may well prove to be capacity that's surplus before it even comes on line.
Of course, if crude prices do fall to $20/bbl, a massive oversupply could trigger a steep fall in gasoline prices, and stimulate demand. But if North American governments hold to improved mileage rate requirements for new cars, even increased demand may not make up for the current oversupply.
But other analysts are suggesting that, particularly with the Saudis keeping a lid on their production in order to stabilize prices, prices may yet rebound to the $100/bbl level before dropping back into the $50-$60 range. If that is the case, demand is likely to fall even more than projected, leaving North America with a growing oversupply problem and refiners facing decent margins, but considerably less volume from which to get those margins.
So refiners are caught in a bind; legislated drop in demand and oversupply means falling volumes and lowered overall profits. Or legislated drop in demand, higher crude prices bringing a corresponding drop in consumer demand, and oversupply at refineries meaning lower consumption and a steadily rising oversupply. Either way, there's not going to be a lot of construction going on—even as the current refineries age. And if North American governments ever get really serious about global warming, these antiquated refineries will not only not be expanded, but will begin closing to meet emission requirements—which will finally take out the excess capacity, but will not encourage anyone to build new plants. Ultimately, this could mean that North America will be entirely reliant on shipping crude overseas ( that is, oil sand crude, making it even less economically viable than it is today) and importing refined hydrocarbons. Which is, contrary to my expectations, already happening.
Some analysts are suggesting that with the economy still tanking and excess inventory of gasoline and other refined products piling up (there's a million barrels per day of production capacity sitting idle in North America at the moment, and surplus inventory has hit a 24-year high), crude oil prices can be expected to tank—possibly as low as $20/barrel.
So even though refiners have seen their margins rising to a ten-year high (according to numbers released by MJ Ervin and Assoc. in 1998 refiners were seeing an annual average margin of 6.7¢/litre which has risen to a year-to-date average of 15.6¢/litre this year), they are not planning any more production capacity and are, in fact, abandoning planned expansion. Plans such as Royal Dutch Shell's now abandoned plans for a refinery near Sarnia, Ont., that was to handle production from the Alberta oil sands. Shell has also delayed the expansion of its Texas plant for two years—obviously wanting a better read on future North American consumption patterns before building what may well prove to be capacity that's surplus before it even comes on line.
Of course, if crude prices do fall to $20/bbl, a massive oversupply could trigger a steep fall in gasoline prices, and stimulate demand. But if North American governments hold to improved mileage rate requirements for new cars, even increased demand may not make up for the current oversupply.
But other analysts are suggesting that, particularly with the Saudis keeping a lid on their production in order to stabilize prices, prices may yet rebound to the $100/bbl level before dropping back into the $50-$60 range. If that is the case, demand is likely to fall even more than projected, leaving North America with a growing oversupply problem and refiners facing decent margins, but considerably less volume from which to get those margins.
So refiners are caught in a bind; legislated drop in demand and oversupply means falling volumes and lowered overall profits. Or legislated drop in demand, higher crude prices bringing a corresponding drop in consumer demand, and oversupply at refineries meaning lower consumption and a steadily rising oversupply. Either way, there's not going to be a lot of construction going on—even as the current refineries age. And if North American governments ever get really serious about global warming, these antiquated refineries will not only not be expanded, but will begin closing to meet emission requirements—which will finally take out the excess capacity, but will not encourage anyone to build new plants. Ultimately, this could mean that North America will be entirely reliant on shipping crude overseas ( that is, oil sand crude, making it even less economically viable than it is today) and importing refined hydrocarbons. Which is, contrary to my expectations, already happening.
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