Dear Mr. President: Don’t Forget the Refineries
Last night in the State of the Union, President Obama discussed policy for clean energy and big oil. The government should consider revisiting tax incentives for refineries.
Valuing refined products separately from crude oil and using refineries as independent profit centers is stupid. Above and beyond that, it is dangerous. Because some green-eyed accountants showed vertically-integrated refiners how their real profits came from crude oil (duh), they started to look at refineries as separate entities that need to show profits on their own. In the process, they are missing the point and they run the risk of marginalizing US crude.
If the profits are in crude and large oil companies continue to close refineries in the US, it will leave us in the position of needing to sell American crude to foreign refiners to process – and then pay to bring it back. These companies may make more money this way, but it has serious national security risks. And it could short-circuit shale-oil development before it gets started.
Sorry, shareholders, but we need laws forcing an integrated approach to refining or there will be regional outages and strategic dependencies that scare us to blazes. We do not burn crude oil, so it has to be refined before we can use it. We understand closing refining units, or upgrading them, but we should not be closing whole refineries. It is a recipe for disaster.
Up until 2008, we routinely used 95%-100% of our refining capacity and needed to import more than a million bpd of gasoline. Just because the recession has changed that recently does not mean it will be like this forever. We are already on the brink of losing all the refining in the US Northeast, or everything that serves it, except the US Gulf Coast. Any problem with the Colonial Pipeline could suddenly leave the Northeast without gasoline, heating oil or diesel. And, because of overly sensitive environmental regulations, we do not have enough storage to buffer us against any sudden shortfall. Letting this happen borders on criminal, and to do it just because refining returns 2%-8% while crude oil exploration can yield 20% is short-sighted in the extreme.
Without refining, crude oil effectively becomes meaningless to the US, at least as an instrument of strategic independence. We would have to export it to get it refined before we could use it, and that introduces a number of new vulnerabilities. We understand that some of the units being closed are old and out of date, but others are being closed because of the Brent-WTI spread or because the crack spread does not do as well as money invested in exploration or drilling. Cutting out refining, though, is like razor makers suddenly stopping making razor blade holders because all the profit is in the replacement blades. Let someone else make the Track-Five, we will make the blades and get more back on each dollar invested. At the end of the day, that is the argument. We think it’s stupid – and dangerous. Maybe we need to shift tax advantages from drilling to refining.
-Peter
pbeutel@cameronhanover.com
