THE sprawling acres of pipes, towers and tanks, which smash and rebuild hydrocarbon chains to turn crude oil into petrol, diesel and other useful stuff are vast and complicated. But the impressive scale of oil refineries is not matched by their profits. Refining in Britain is a miserable business these days.
In the 1960s big oil companies were so sure that demand for petrol would rise forever that they built the refineries to match. But demand for road fuels has peaked and is now falling—by 8% between 2007 and 2011. High fuel prices and stalling sales of vehicles that are anyway far more efficient are to blame. The result is wafer-thin margins and closures. Since 2009 two British refineries, at Coryton in Essex and in Teesside, have shut down. All but one of the remaining seven has been sold or been put up for sale in recent years.
Refineries operate in a global market. Petrol and diesel can be sent by tanker around the globe as readily as crude. Competing with sparkly, super-efficient new refineries in Asia and the Middle East is hard. Moreover, Britain’s older refineries were designed to produce petrol, which is increasingly the wrong fuel. Petrol sales by volume fell by 34% in the decade to 2011 while diesel grew by 73%. Around 40% of diesel is now imported. Nor do British refineries produce enough kerosene, which powers passenger jets, to supply the home market.
But the market for fuel is still shrinking and tiny margins mean profits can be wiped out by small shifts in the price of crude or other costs. In the past five years Europe has lost 2.2m barrels a day (b/d) of refining capacity. Volker Schultz, Essar Oil’s boss in Britain, reckons that another 1m b/d needs to go. But that is not his only concern. Efforts in Britain to introduce a carbon floor-price will put its refineries at a disadvantage to European ones, and European environmental legislation will make the whole continent’s refineries even less competitive. It must seem to the industry as if it has a large hole in its tank and a small patch to fix it.
economist
