Petroleum Refining: Economic Performance and Challenges for the Future

Publication Date: May 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

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Abstract:

The petroleum refining industry provides products that are critical to the functioning of the economy. Virtually all transportation; land, sea, and air, is fueled by products that are refined from crude oil. Industrial, residential, and commercial activities, as well as electricity generation, use petroleum based products. Along with volatile changes in crude oil prices, the industry has faced evolving health, safety, and environmental requirements which have changed and multiplied product specifications and required capital investment in refineries.

Since the late 1990s, the industry has undergone significant structural change which might alter its profitability requirements, its ability to provide stable product volumes to the consuming market, as well as its ability to adapt to current and future environmental requirements.

Two significant structural changes characterize the industry. Mergers, acquisitions, and joint ventures have changed the ownership profile of the industry, altering concentration patterns both regionally and nationally. A change in business model from an integrated component, to a stand alone profit center, has focused attention on requirement of competitive profitability rates from each stage in the production chain if the industry is to remain viable in its current form. Evidence suggests that the new market structure and business model might demand better economic performance from the industry. Regulatory compliance to meet congressionally mandated environmental standards, both on refined products and refinery sites, requires substantial capital investment by refiners, and has resulted in reduced profitability, according to the Energy Information Administration (EIA). To the extent that continued capacity expansion and technological investments are reduced, or not undertaken, because of low rates of return, U.S. dependence on imported refined products might increase, or product markets could be disrupted by shortages and price spikes.

As the 109th Congress considers energy legislation, it is likely to be concerned with domestic energy security and market stability, issues linked to the performance of the petroleum refining industry. Increased imports of refined products, particularly motor gasoline, combined with growing imports of crude oil could make the U.S. increasingly vulnerable to shocks originating in the world oil market. Importing motor gasoline into the U.S. in appropriate volumes may become increasingly difficult because of the unavailability of world supplies consistent with U.S. fuel specification requirements.

This report will be updated.