Wednesday, June 18, 2008

Observations on the Refining Industry

The conversations at the Southern California Section of AIChE meeting on June 17, 2008 were very interesting. One of the most discussed topics was the high price of gasoline and the direction in which the refining industry is heading. The average price of unleaded regular gasoline in the Los Angeles area is $4.65 at this time.

I believe it is crucial to note that, first, gasoline demand is decreasing in the U.S., second, the price of crude oil is much higher than supply and demand would indicate it should be, and third, a new energy technology is looming on the horizon. I will explain each of these.

First, the U.S. Energy Information Agency, EIA, publishes each week on Wednesday a summary of the previous week's petroleum activity. One of the items tracked by EIA is the rolling four-week demand for gasoline. The gasoline demand is compared to the same period from one year ago.

For the past few weeks, the current demand is somewhat less than the year-ago demand. This is significant, because in the past the current demand has increased by a few percent. The four-week average reported today (June 18, 2008) was 1.9 percent below that of a year ago. This indicates that American drivers are taking action to decrease gasoline usage, even though the population continues to grow. I expect this trend to continue, as Americans purchase more fuel-efficient cars such as hybrids, plug-in hybrids, and pure electric vehicles. It is instructive to note that several auto manufacturers are closing plants that make vehicles with low miles per gallon, such as pickup trucks and SUVs. At the same time, the sale of hybrids is booming. Plug-in hybrids will also zoom off the showroom lots when they are available, probably in 2009.

Second, the high price of crude oil. Today's price was $136 per barrel for light sweet crude oil. Oil producers are either not able, or not willing, to meet the world demand, and the difference is made up by drawing down stored oil inventories. This is not much on a percentage basis, but it is nonetheless significant. However, in light of the first point, and especially the third point to follow, this makes a lot of sense. Basic economics predicts that prices rise during a shortage, whether actual or perceived. This is happening with crude oil.

Third, there is an incredible new energy technology that is looming. What went virtually un-noticed four years ago was a breakthrough in basic research by scientists at Imperial College London. As reported here in the journal Science, these researchers found the precise atomic structure of the protein in plants that splits water into hydrogen and oxygen during photosynthesis. The structure is a cube with an appendage at one corner. This discovery will allow, after a period of more research and development, the production of vast quantities of hydrogen from sunlight and water, at ambient temperature and pressure. The only question, I believe, is how long it will be from laboratory discovery to commercialization.

The availability of virtually free hydrogen as a fuel source, and within the next 15 years or so, has serious implications for oil-rich countries around the world. The demand for oil will be reduced by a factor of approximately four or five. Thus, if total world oil demand remains as it is today at roughly 80 million barrels per day, I predict that the demand will drop to 16 to 20 million barrels per day. The crude oil will be used primarily to make petrochemical feedstocks, lubricating oils, and asphalts.

The implications are huge for oil refineries, power plants, automobile manufacturers, those in the oil exploration, development, and production industry, and even the natural gas industry. There will no longer be a need for power plants that burn coal, natural gas, and especially nuclear power. Instead, clean-burning hydrogen will be burned in electric power plants. And, if done properly, the water vapor that is produced can be condensed, collected, and recycled to the solar-powered synthetic photosynthesis plants that produce the hydrogen.

Given all the above, it is little wonder that oil-rich nations are pressing to keep the price of oil as high as possible. Their days in the sun, so to speak, are coming to an end.

Roger Sowell is an attorney who represents and defends oil and petrochemical companies. His website is

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