Oil companies nix expansion plans -- is your bullshit meter pegged yet?

In My Humble Opinion
21

[QUOTE=Sunrazor]
Ah, yes, the “proposal”. The statement that there will be no further investment in refinery capacity is Big Oil’s response to that proposal. To which, as I previously stated in this thread, the Bush Administration will say, “Fuck it!” to the “proposal” within 30 days. I promise you, there will be a “course correction” before mid-July on this issue. And by the end of third quarter calendar 2007, Big Oil will announce plans to increase capacity 10 percent within five years.

I’d bet a key lime pie on it.
[/QUOTE]

The whole pie or just a slice?

What I don’t follow is why the Oil co sulking and demanding their ball back, not wanting to play any more and not going to build any more refineries puts any pressure on the gov to back down from the 20% proposal for bio fuels.

I am sure the oil cos have been and still are lobbying over these limits as that 20% is 2mbbl/day of gasoline they won’t get to sell from the refinery in 2015.
No doubt the farming guys are lobbying just as hard to keep them, and I believe the bio fuels plans are quite popular with the voters in those farming states.

The drive for bio fuels was to reduce dependence on foreign crude, not to relieve pressure on national refinery capacity. The reduction is certainly a useful side benefit, and means you don’t have to increase capacity and plonk a bunch of very unpopular industrial plants on voters doorsteps.

The gov may back down from the bio fuels requirement for other reasons such as the capacity is not there, the pressure on the food chain, increased risk due to weather etc, but big oil not building refineries does not put pressure on them.

On refinery utilization, the 85% number is because the refineries are out of action due to planned maintenance or unplanned outages, not because the refiners are deliberately constraining production. This last year or so there has been a higher than normal rate of unplanned outages, mostly in the higher tech hydrocracking and coking ends. The outages have also taken longer to recover from, a recent comment from Valero blamed a very tight service company sector capacity. People and equipment are very difficult to find, leading to a 20% reduction in productivity of shut down staff with a 60% increase in cost.

So yes supply and demand, supply was low, in part due to refinery outages, demand was high. Yes shutdowns may drive up the cost of gasoline, but whilst your plant is shut down everyone else is making money selling gasoline. Deliberately shutting down to drive up the price is a very generous thing to do for your competitors, not such a great business decision for your self.
Unless of course there is a world wide conspiracy to coordinate the shutdowns. Some say the glass is half full, some say half the glass contents have been stolen in a secret government conspiracy driven by the corporations.

cheers

22

But is it really “supply and demand” anymore? With Exxon reporting record profits, it doesn’t seem to me that there really is an open market. More like all the Oil companies agreeing on how much they can charge. It’s as much a monopoly as when Standard Oil was just one big company.

23

[QUOTE=Sunrazor]
From a practical standpoint, the fact that they don’t know how. The technology and the knowledge are owned by people already in the business, and they’re not going to help anyone compete with them.
[/QUOTE]

That doesn’t sound very plausible. I’d guess that just about every chemical engineer in the world knows at least the basics of refining oil. It seems to me that the problem wouldn’t be building the refinery, it would be supplying the crude oil to feed it. I don’t have an idea how the oil market works though, so that is just a guess.

24

[QUOTE=Atrael]
But is it really “supply and demand” anymore? With Exxon reporting record profits, it doesn’t seem to me that there really is an open market. More like all the Oil companies agreeing on how much they can charge. It’s as much a monopoly as when Standard Oil was just one big company.
[/QUOTE]

No, it’s Supply and Demand[sub]TM[/sub]. And if you disagree, then you don’t understand Economics[sub]TM[/sub], and are therefore stupid. :wink:

This message has been brought to you by the Libertarian party

25

[QUOTE=Atrael]
But is it really “supply and demand” anymore? With Exxon reporting record profits, it doesn’t seem to me that there really is an open market. More like all the Oil companies agreeing on how much they can charge. It’s as much a monopoly as when Standard Oil was just one big company.
[/QUOTE]

There is no collusion between all the O & G giants. Everybody knows that. We know because they keep telling us, and they wouldn’t lie about how honest they are, would they?

26

[QUOTE=Dag Otto]
That doesn’t sound very plausible. I’d guess that just about every chemical engineer in the world knows at least the basics of refining oil. It seems to me that the problem wouldn’t be building the refinery, it would be supplying the crude oil to feed it. I don’t have an idea how the oil market works though, so that is just a guess.
[/QUOTE]

I would agree, the refineries are generally built by civil engineering groups, ABB, Techint, KBR. They really do not care that much who contracts them to build it. A recent example is Reliance, a new Indian oil company, they plunged in head first to deep water drilling and built India’s largest refinery. They were not major players prior to this.

Clearly they are not off the shelf purchases and the end user has a lot of input to the design and specifying what bits of plant they need to optimally produce their desired product mix based on their expected crude type purchases. The refinery construction process is certainly not a company secret to the oil cos.

Interesting (well if you like this sort of thing) article here

http://www.hydrocarbons-technology.com/projects/essar/index.html

on a similar refinery.

As Dag Otto said, the issues are supplying the crude, also having a marketing structure to sell the products, but above all, having wadges of cash to finance it all.

cheers

27

[QUOTE=featherlou]
There is no collusion between all the O & G giants. Everybody knows that. We know because they keep telling us, and they wouldn’t lie about how honest they are, would they?
[/QUOTE]

Well I believe they would lie about lots of things, such as commitment to safety and environmental standards, foreign corrupt practices, exactly how much lobbying of the US gov they actually do etc etc.
Lying about pricing collusion, probably not so much. Given that the majors do not control a large amount of the crude production they are not in a good position to swing the market, and if they tried and bet the wrong way, they could end up loosing a great deal of money. Thus the execs would not only risk the wrath of the shareholders, their bonus and their job, but possibly a stint in jail as well, for an uncertain outcome.

High profits does not equal collusion.

cheers

28

[QUOTE=NaturalBlondChap]

So yes supply and demand, supply was low, in part due to refinery outages, demand was high. Yes shutdowns may drive up the cost of gasoline, but whilst your plant is shut down everyone else is making money selling gasoline. Deliberately shutting down to drive up the price is a very generous thing to do for your competitors, not such a great business decision for your self.
Unless of course there is a world wide conspiracy to coordinate the shutdowns. Some say the glass is half full, some say half the glass contents have been stolen in a secret government conspiracy driven by the corporations.

cheers
[/QUOTE]

Enron did exactly that. They were caught on tape talking about deliberately taking power plants off-line to drive up prices. And IIRC that’s not even what brought them down; it was their creative accounting. Granted it’s a different industry, but it does show that a “worldwide conspiracy” is not required for a company to engage in such practices.

29

When are you going to build a new refinery? ANS Why, we are at peak oil and are keeping up fine. They will be overkill soon. Plus capacity has gone up over 20% at existing plants.

30

[QUOTE=lowbrass]
Enron did exactly that. They were caught on tape talking about deliberately taking power plants off-line to drive up prices. And IIRC that’s not even what brought them down; it was their creative accounting. Granted it’s a different industry, but it does show that a “worldwide conspiracy” is not required for a company to engage in such practices.
[/QUOTE]

Fair point.
However the price drive up for electricity was in localized markets, and in places where Enron had a dominant position in the supply through contracts, generators, hedges and what not(that’s from memory, may be wildly hallucinating). Electricity generators can be ramped down and up, particularly the gas powered ones, to take advantage of higher prices and the dynamic market. I had a conversation with a few people from Seimens who manufacture small gas fired generators, they commented that people were buying them purely for standby use to be able to sell electricity during peak hours at silly prices per megawatt-hour. The capital cost were low enough that is was economic to have units sat idle.

In contrast the gasoline price ramp up is pretty much global. The refinery outages are generally planned many months/years in advance and the unplanned ones are fixed as fast as equipment and people can be sourced. Production runs cannot be switched on and off easily and capital and opex are so high that having shut in capacity is very expensive.
There is a lack of liquidity in some areas due to specialized blends (California specifically) but these are also areas where there is a lot of refinery capacity. No one player has a dominant position. If one guy tries single handed to shutdown refining, they only help their competitors.

So yes in the electricity markets one player with a dominant position could and did swing prices in a local market. In the gasoline refining markets no one has that position, the time cycle is much longer and hence makes the market fixing even riskier and te market is much more global.
I think there is sufficient difference between the situations to make illegal acts in one, not applicable to the other.

cheers

31

[QUOTE=gonzomax]
When are you going to build a new refinery? ANS Why, we are at peak oil and are keeping up fine. They will be overkill soon. Plus capacity has gone up over 20% at existing plants.
[/QUOTE]

Problem is, the two statements:

The refineries are keeping up with supply just fine.

and

Supply shortages are responsible for the rising price of gasoline (as per NBC).

seem mutually-exclusive. I think that’s what’s pegging people’s bullshit meters.

32

[QUOTE=lowbrass]
Problem is, the two statements:

The refineries are keeping up with supply just fine.

and

Supply shortages are responsible for the rising price of gasoline (as per NBC).

seem mutually-exclusive. I think that’s what’s pegging people’s bullshit meters.
[/QUOTE]

The current capacity is not keeping up with demand.
The future refinery capacity could keep up with demand if the 20% bio fuels comes into being, hence they don’t want to build any more. Building a refinery to account for a current shortfall that may not last is not a good investment.

33

[QUOTE=NaturalBlondChap]
Fair point.
However the price drive up for electricity was in localized markets, and in places where Enron had a dominant position in the supply through contracts, generators, hedges and what not(that’s from memory, may be wildly hallucinating).

[/quote]

But that all came to light after the fact. While this was going on, those who decried it were shouted down by people chanting the “supply and demand” mantra. If those fuckers hadn’t gotten caught red-handed ADMITTING it on tape, people would probably still be claiming “supply and demand” to this day.

They weren’t just turning them down, they were taking them completely off-line for “maintenance”, IIRC.

I agree that the market was much more dynamic due to the nature of the product. However, you can’t argue that “it wouldn’t do them any good to artificially restrict production because they would lose out from the competition”, since the fact that they did in fact do so proves that reasoning is false.

The reason I’m skeptical of all the “it can’t be done” arguments now regarding the oil companies is that the same thing was said about Enron at the time.

34

[QUOTE=NaturalBlondChap]
Deliberately shutting down to drive up the price is a very generous thing to do for your competitors, not such a great business decision for your self.
[/QUOTE]

But none of the oil companies are increasing their capacity. So long as that persists, prices(and profits) are going to remain high.

Let’s suppose, for the sake of the argument, that the oil companies really are manipulating supply to keep prices high. Each of them has two options: increase capacity or maintain the status quo. Each and every one of them knows that if one company were to try to increase their capacity, the rest would have to follow suit to maintain their profits. This would quickly lead to a race to the market supply(and price), which would mean lower profits. Now, they can start the process of increasing capacity at basically any time. Obviously building a refinery is a slow process, but they can start to do this whenever they like. So it seems to me that the best strategy for any individual company is to wait for someone else to start building a refinery before starting to build their own. This would allow them to extract the higher profits for as long as possible. The net effect of this would to have the oil companies never increase their capacity, because everybody’s best strategy is to wait for somebody else to move first.

35

[QUOTE=NaturalBlondChap]
The whole pie or just a slice?
[/QUOTE]
A whole damn Village Inn key lime pie.

[QUOTE=NaturalBlondChap]
The gov may back down from the bio fuels requirement for other reasons such as the capacity is not there, the pressure on the food chain, increased risk due to weather etc, but big oil not building refineries does not put pressure on them.
[/QUOTE]
I don’t doubt that, within the timeframe upon which the pie is wagered, one or more of those reasons will be offered as a reason to back down from the commitment to bio fuels, and when that time comes I will be happy to explain why each and every one is bogus. The key point is, when it happens, it will be followed shortly by an announcement that gasoline refinery capacity will be increased after all. When that happens, I’ll e-mail you the phone number of the local Village Inn and my mailing address.

[QUOTE=Dag Otto]
That doesn’t sound very plausible. I’d guess that just about every chemical engineer in the world knows at least the basics of refining oil. It seems to me that the problem wouldn’t be building the refinery, it would be supplying the crude oil to feed it. I don’t have an idea how the oil market works though, so that is just a guess.
[/QUOTE]
I undoubtedly overstated the “mystery” of cracking oil – yes, it’s pretty much a high school chemistry experiment on a very large scale. And yes, the primary problem probably would be getting crude oil supply. But let’s face it – we’re talking billions of dollars of investment here, in a volatile market and with a highly specialized product. I cannot imagine the logistics of someone outisde the oil industry trying to build a refinery.

The thing that sent me screaming from the sofa to my computer to post the OP was that the oil company spokesman couched the whole thing in such insolent, pouting terms. It’s like these guys have learned nothing about public relations. Why not approach it this way: “Hey, we’re really glad to see the government getting behind the bio fuels push, because that sure takes the pressure off of us to build new refinery capacity. In fact, it’s doubtful that increased capacity would really lower the price of gasoline significantly because it’s so expensive to build it. And, it’s just not a really good investment for us. It’s a better investment for us and for America to begin a serious transition to bio-fuels, and we are behind that all the way!” Okay, maybe there’s a certain amount of BS in that, too, but it’s a helluvalot better spin than, “Bio-fuels? Fuck you, we ain’t gonna’ build any more refineries, then!” That’s the message I got from the original story.

36

[QUOTE=Sunrazor]

I don’t doubt that, within the timeframe upon which the pie is wagered, one or more of those reasons will be offered as a reason to back down from the commitment to bio fuels, and when that time comes I will be happy to explain why each and every one is bogus. The key point is, when it happens, it will be followed shortly by an announcement that gasoline refinery capacity will be increased after all.
[/QUOTE]

It is highly likely I have misunderstood something, but is this not exactly what the oil dudes are saying. Because biofuels are planned to take up the shortfall in refined product over the next 10 years, the oil cos won’t increase current capacity, as it would become redundant in 10 years time. Expansion has been reduced (not stopped entirely) and they will revisit plans as the situation develops. That is to say, if the biofuels does not produce the goods, for what ever reason, even bush reneging on his ideas, they will start pushing up capacity again. Well that is how I read the quote from the Valero spokesperson in the article.

[QUOTE=Sunrazor]

A whole damn Village Inn key lime pie. <snip> I’ll e-mail you the phone number of the local Village Inn and my mailing address.
[/QUOTE]

We would be on, but I think we both agree that the oil cos will ramp up capacity if bush calls off his biofuels plan. That is what they said they would do. I don’t think it would be sensible to make a bet on that.
I was thinking that you were saying that the oil cos were threatening to call off expansion plans as a stick to force Bush to kill the biofuels plans, and I just don;t see where the stick is. I don’t see why he would call off the biofules plan based on the cut back in expansion, but then again , not a lot of the decision from him make much sense to me.
If that is the case, then we can just leave the criteria as - xxx days from the date of these announcements, Bush will call off his biofuels plan. The reasoning will of course be obfuscatory nonsense as he won’t want to admit it was a bad plan from the start. We have no way of confirming that the refiners 'threats, if that is what there are, prompted the decision, but what the hell lets roll with it. All you need to do between now and then is to figure out a way to ship a pie to Argentina.

[QUOTE=Sunrazor]

The thing that sent me screaming from the sofa to my computer to post the OP was that the oil company spokesman couched the whole thing in such insolent, pouting terms. snip
[/QUOTE]

Yes the comment from the Chevron dude

[QUOTE=Chevron Dude]

Why would I invest in a refinery when you’re trying to make 20 percent of the gasoline supply ethanol.
[/QUOTE]

Is pretty blunt and he should have known that would be a somewhat inflammatory and does sounds like he has stuck his bottom lip out and thrown his rattle out of the pram. He clearly should go back to Handling the Press 101. I would suspect the oil cos do not like the bio fuels plan at all, as it takes that 2 million bbl/day of growth and hands it off to someone else. His question does remain, why would anyone invest in short term capacity increases.

I don’t think any of the refiners want to get back to the late 80 situation where there were 220+ refineries in the US, of which something like 50 were idle and cold stacked. That is a lot of rusting hardware and wasted capital. I cannot see who that situation is good for.
There is a real question of how to address the intermediate shortfall. I still do not see why anyone would make significant investments to make up the shortfall on such a short term basis with diminishing returns. 2 million bbl/day sold this year, 1.8 next, zippo in 10. Would you spend your money on that sort of deal?

cheers
NBC

37

[QUOTE=NaturalBlondChap]
Shell and BP are both actively involved in renewables/hydrocarbon alternatives, and see themselves (or maybe just branding themselves) as energy companies. This is to say they will provide sources of energy to the consumer whatever the source.
[/QUOTE]

Um, not WHATEVER the source. Any distributed source, like solar that could be captured by home systems, are anathema to them, as it would put them out of business. They all want a centrally distributed power source that everyone has to pay for … preferably, whatever price is asked. Pretty close to the present system.

38

[QUOTE=lowbrass]
But that all came to light after the fact. While this was going on, those who decried it were shouted down by people chanting the “supply and demand” mantra. If those fuckers hadn’t gotten caught red-handed ADMITTING it on tape, people would probably still be claiming “supply and demand” to this day.

They weren’t just turning them down, they were taking them completely off-line for “maintenance”, IIRC.

I agree that the market was much more dynamic due to the nature of the product. However, you can’t argue that “it wouldn’t do them any good to artificially restrict production because they would lose out from the competition”, since the fact that they did in fact do so proves that reasoning is false.

The reason I’m skeptical of all the “it can’t be done” arguments now regarding the oil companies is that the same thing was said about Enron at the time.
[/QUOTE]

In the Enron case, partly due to their dominant position in localized markets, they were in a situation where no one else could supply the spare capacity so any cut backs would mean the intra company spot prices would spike during peak hours, more than enough to offset the loss in sales volume.

For a refiner to make a decision to cut back to drive the price up and still offset the sales vol loss, they have to be sure that the volums they can cut back will drive the price up sufficiently and no other refiner can replace the drop in production, and someone will not have the bright idea of spot chartering a clean tanker from Rotterdam and bring some additional gasoline into the market.

I agree it is not that price manipulation cannot be done, but it would be a hell of a risky thing to do, with many more variables over a longer time span than the electricity shenanigans.

39

[QUOTE=Evil Captor]
Um, not WHATEVER the source. Any distributed source, like solar that could be captured by home systems, are anathema to them, as it would put them out of business. They all want a centrally distributed power source that everyone has to pay for … preferably, whatever price is asked. Pretty close to the present system.
[/QUOTE]

Well Shell does have a pretty website on Solar
http://www.shell.com/home/Framework?siteId=shellsolar&FC2=/shellsolar/html/iwgen/leftnavs/zzz_lhn2_0_0.html&FC3=/shellsolar/html/iwgen/about_shell/who_we_are_0129.html

(ok one day I wil learn to make those link look just as pretty)

I agree fully, they still want to be able to sell energy to you, they just want to diversify the source. I was contrasting Shell etc to some other companies that are ’ we are hydrocarbons only’ mentality.

40

[QUOTE=NaturalBlondChap]

For a refiner to make a decision to cut back to drive the price up and still offset the sales vol loss, they have to be sure that the volums they can cut back will drive the price up sufficiently and no other refiner can replace the drop in production, and someone will not have the bright idea of spot chartering a clean tanker from Rotterdam and bring some additional gasoline into the market.

[/QUOTE]

But the argument assumes its own conclusion. You’re saying there cannot be collusion because the competition would jump in and thwart any market manipulation. But this assumes there is no collusion in the first place. If anyone were going to undercut the competition, now would be a good time, since record-high prices AND record-high profits exist. So where’s that chartered tanker from Rotterdam?