Why is Oil Refining Down?

Why is Oil Refining Down?

Operating refinery capacity in the US has decreased since 2020 

Over the last three years, more than 1 million barrels a day of refining capacity went offline as a result of the pandemic and extreme weather.

Based on the data from EIA, the U.S. operable atmospheric crude oil distillation capacity experienced a large decline from about 19.0 million barrels per calendar day at the start of 2020 to 18.1 million b/cd in 2021, which is nearly 4.5% decline mainly contributed by operating refinery capacity.  

The data also shows that the number of operating oil refineries in the US lowers from 131 at the beginning of 2020 to 124 at the beginning of 2021. The decline of seven refineries a considerable and concerning number compared to the change in the number of previous years 

Gulf Oil Corp., Gulf Service Boat & Fixed Platform Rig Creator: Richie, Robert Yarnall Date: July 15, 1956

What causes the decline of both the number and capacity of US refineries? 

Pandemic Effects 

One of the most important reasons for the decreased operating refinery capacity is that the COVID-19 epidemic had a negative impact on the entire oil industry. In 2020, due to this pandemic, people lowered their frequency of traveling or driving. In that case, the demand for motor fuels and refined petroleum products experienced a substantial decline, causing considerable difficulty for the profitability of oil refining. The actions that the government took to deal with the decrease in demand is to shut down the refinery plants. In order to avoid the surplus of refining oil and solve the problem of refinery margins. 

Use of Renewable Energy

The market interest in developing renewable diesel production is another limiting factor that contributes to the decline of refinery capacity. In recent years, in order to respond to the harmful effects of oil production on the environment. As a result, the government increased research and production of renewable diesel fuel. In this way, conventional refineries receive less and less investment. Since both the government and investors are not optimistic about the future of the oil refining industry. Moreover, additional production of a refinery requires a large amount of cost. In satisfying the government policy of environment production. Such as waste discharge, plant scale or refinery operation.

Therefore, as the cost of refining production increases and investment of US refineries decreases. Furthermore, the supply of refineries gets lower, which is the reason why the number and capacity of US refineries decreases considerably. As Chevron CEO Mike Wirth said

“there may never be a new refinery built in the US”

Moreover, the prospect of a new refinery became limited by the pandemic. In addition, proliferation of the use of renewable diesel, which lose interest in investment and government’s attention.

A breakdown of the products made from a typical barrel of US oil[33]

Written by Kaixin Cheng

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Why is Oil Refining Down?