USA Importing Gasoline from India

"Reliance Industries Ltd., the Mumbai-based refiner seeking to compete overseas, has sent its first shipment of gasoline in two years to the U.S. [to New York] from its new plant..." according to a July 15, 2009 report. The ship contained 676,000 barrels of gasoline according to the report.

This is interesting (perhaps curious is the better word) because U.S. refineries are operating far below capacity, somewhere in the low 80-percent range. Yet, gasoline and gasoline component imports into the U.S. are running at approximately 1 million barrels per day. This import volume represents approximately one-eighth or 12.5 percent of the US gasoline demand. There are at least two plausible explanations for this, and each has implications.

First, it may be cheaper to import gasoline from India than it is to import crude oil and refine it into gasoline with refineries in the U.S. This may be true. India is just a short distance from the Middle East, and Mumbai is on the west coast. The additional journey from the Middle East ports to Mumbai, and then to New York would add only a small amount to the already low transportation cost. Plus, once the oil is refined in India, only the gasoline must make the long trip around Africa, up and across the Atlantic and into New York. The other products can remain in India, or be sold into Asia. America's refineries are struggling mightily at the moment, and some are likely to shut their pumps for a long time, perhaps forever. With a new round of onerous regulations facing them in the form of cap and trade (already law in California, and pending at the national level), some refineries may just hang it up. This is how the U.S. refining industry went from 300-plus refineries around 30 years ago to 146 today (more or less, they keep starting and stopping some). Environmental regulations forced refining companies to invest billions in the plants without producing any more product, and about half the refineries elected to shut down rather than invest to comply. In contrast, the Reliance Industries new refinery is huge and enjoys economies of scale, plus its investment cost was approximately one-half what it would have cost if built in the USA. I am not familiar with its operating costs, of which energy consumption is a large part, but if it was designed and built to conserve energy, it has very low operating costs compared to the older, less efficient refineries in the USA. Also, the labor cost is likely less in India.

Second, the product slate from U.S. refineries is such that too much gasoline is produced from each barrel of crude oil. On average, gasoline represents approximately one-half the yield of refineries in the USA. In contrast, other refineries in the world typically yield somewhat less gasoline and more distillate such as diesel and home heating oil. Before the great recession of 2009, there was a shortage of diesel fuel in the world market and prices were high. U.S. gasoline production peaked in 2006, while diesel production continued to increase until very recently. The implication is that U.S. refineries are no longer optimally configured for the domestic market: they should produce more diesel and less gasoline from each barrel of crude. This is not good news for refiners at a time when profits are down or negative, and additional regulatory burdens are being added (see AB 32 in California, plus cap and trade, above). The funds to build the processing units to change the overall yield in refineries may be difficult to find, or impossible.

The portion of the crude barrel at question here is known by the rather cryptic name of "gas oil." Gas oil is a fairly heavy component produced by an atmospheric crude unit and vacuum crude unit. In order of thickness, or heaviness, the products from a typical atmospheric and vacuum unit are naphtha, jet, diesel, gas oil, and heavy fuel oil. The gas oil is either cracked to gasoline in a Fluid Catalytic Cracker, or to a combination of gasoline and diesel in a hydrocracker. Changing the overall yield to produce more diesel requires investment in hydrocrackers, which are very expensive process units.

The next year should bring clarity to the U.S. refining industry, as the industry may be waiting for the recession to end and demand for products to grow. But with refineries like India's Reliance Industry ready, willing, and able to export products, it is very likely that several U.S. refineries will be shut down. Their boards of directors may have no choice, since they have a fiduciary duty to their shareholders to maximize income. Failure to rationalize their refining portfolios may result in shareholder derivative suits or proxy fights for changed board membership.