Refinery utilization rates in the U.S. (40973 bytes) have steadily increased since oil price and allocation decontrol in 1981, the Energy Information Administration reports.
The annual average utilization rate for atmospheric distillation has grown from 68.6% of operable capacity in 1981 to 92.6% in 1994 and hit a 20 year peak of 96.4% in August 1994.
EIA said, This dramatic increase in refining capacity utilization has stimulated a growing interest in the ability of U.S. refineries to supply domestic requirements for finished petroleum products.
Federal price and allocation rules benefited small refineries, so the number of such plants grew from 268 in 1973 to 324 in 1981, while distillation capacity grew from 13.6 million b/d to a peak of 18.6 million b/d.
But after decontrol, many small refineries and older, inefficient plants began to close. Between January 1981 and January 1989, the U.S. lost 120 refineries and 3 million b/d of capacity.
Thereafter, EIA said, capacity remained stable until 1992, when, pressured by the costs of environmental regulations and unfavorable refining economics, several marginal refineries shut down, while a few larger refineries idled or permanently shut down crude distillation units. By Jan. 1, 1995, U.S. operable refineries numbered 175 with a total crude oil distillation capacity of 15.4 million b/cd.
Product demand
Although distillation capacity has dropped the last 15 years, gross inputs have risen almost every year since 1983. They have grown from 11.9 million b/d in that year to 14 million b/d in 1994. This was due to a rise in U.S. demand for petroleum products that began in 1983. U.S. demand has exceeded U.S. crude distillation capacity every year since 1985.
Total petroleum product demand averaged 15.7 million b/d in 1985, 0.4% higher than the average operable crude distillation capacity. By 1994, total petroleum demand exceeded operable capacity by 17% as demand grew to 17.7 million b/d and operable capacity averaged 15.2 million b/cd.
With declining capacity and rising gross inputs, the amount of unused crude oil distillation capacity has shrunk significantly since 1981. About 5.9 million b/d of available crude distillation capacity was idle in 1991. By 1994, the difference between available capacity and gross inputs had narrowed to about 1.1 million b/d.
EIA said as a consequence, operable utilization rates for crude distillation units have experienced a fairly steady upward trend since 1981. Utilization rates have increased nearly every year during 1981-94, growing from an average 68.6% in 1981 to 92.6% in 1994, the highest annual level since 1973.
Emphasis shifts
EIA noted that since 1980 the U.S. refining industrys emphasis has shifted from growth of operable crude oil distillation capacity to investment in downstream (secondary) processing units, thereby increasing the overall level of refinery capacity.
The agency said, This transition began several years before the passage of the Clean Air Act amendments in 1990 and was due to heightened demand for lighter, cleaner products that were being produced from increasingly heavier and more sour crude oils.
In contrast to utilization rates for crude distillation, utilization rates for secondary processing units have increased only slightly or even declined between 1987 and 1994. EIA data show the average calendar day utilization rate for catalytic cracking increased every year through 1993 before dropping slightly to 92.2% in 1994.
Hydrocracking utilization rates have been consistently less than those of catalytic crackers and cokers. Average annual capacity for hydrocracking increased 14.6% in 1987-94, while average annual inputs to hydrocrackers grew about 6.3% during those years.
Agency calculations
EIA calculated utilization rates on calendar day capacity.
It said gasoline producing refineries assume operating factors for atmospheric distillation of 94-98%, while those for nongasoline refineries (asphalt, lube oil, waxes, and other heavy products) are lower due to the different quality of crude processed and higher frequency of turnarounds.
The study noted that the average industry distillation utilization rate is highly seasonal, with peak rates occurring during the high demand summer motor gasoline season.
EIA said, Because refineries are less likely to take turnarounds during the high demand summer motor gasoline season, it is not surprising to find that many refineries operate at rates in excess of reported calendar day capacity during this period.
Over two thirds of gasoline producing refineries reported gross inputs to atmospheric distillation that exceeded their reported calendar day capacity. What is surprising is that almost 40% of domestic refineries reported a 1 month distillation utilization rate that exceeded their reported stream day capacities.
Refinery margins
EIA pointed out that higher utilization rates have not yielded higher margins for refiners. Gross margins for complex refineries have been relatively flat during the last several years.
The problem with crude distillation is that it is no longer sufficient for analyzing refinery profitability, EIA said. As transportation fuels grow to represent an ever larger slice of the petroleum demand pie, so must the relative complexity of refineries.
Domestic refineries have also had to comply with government regulations on fuel quality, further encouraging growth in secondary processing capacity that in recent years has exceeded demand growth.
EIA added that secondary processing capacity utilization is not a much better yardstick.
Rather than focus on reported utilization rates, it may be more useful to study how marginal costs increase as utilization rates rise (63391 bytes). Marginal costs should dictate gross margins for crude oil refining and market prices for petroleum products.
The marginal costs of increasing throughputs in secondary processing units, such as fluid cokers and catalytic crackers, is likely to be greater than in atmospheric distillation units. It is due to the high marginal cost of running secondary processing units that these units generally represent the constraining capacity in complex refineries.
Thus, in the U.S., cracking margins should provide the first signal that a refining capacity constraint is being reached. The trend in cracking margins over the last 5 years does not indicate that an industry capacity constraint has been reached.
However, analysis of the relationship between domestic secondary processing capacity utilization and refinery gross margins may be problematic because of the important role foreign refiners serve in supplying U.S. petroleum product markets. n
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