Deconstructing the refining sector

By MarketWatch

SAN FRANCISCO (MarketWatch) -- It's spring, that time of year when gasoline prices typically grow faster than weeds. That might not be the case this year but rest assured, refiners are taking remedial steps to mop up excess supplies.

Chevron /quotes/comstock/13*!cvx/quotes/nls/cvx (CVX 76.02, +0.46, +0.61%) , citing continued shrinkage in its refining margins, announced Tuesday it's laying off about 2,000 workers, or about 3% of its global workforce, and seeking to buyers for more assets in its "downstream" refining and marketing business. Read about Chevron's downstream plans.

The problem facing Chevron, and almost everyone else in the world of Big Oil, is that the price of crude oil has been rising faster than they can jack up fuel prices. That's because most oil companies don't produce enough crude to fully supply their downstream operations. To close the gap, they buy crude on the world market, where spot prices are back above $80 a barrel.

Meanwhile, demand for gasoline has slumped along with the economy, resulting in a glut weighing heavily on prices at the pump.

Chevron's remedy is to trim its direct exposure to the fuel market while concentrating on the more lucrative "upstream" exploration and production end of the business, both at home and abroad. They are not alone, and this is not new.

Refiners have been whittling away at capacity in the United States for years. Industry consolidation, aging equipment, tougher environmental standards and difficulties getting permits to build new units have all played a part in the process. So has the trend toward bigger, more competitive refineries elsewhere in the world, often built by the major oil exporting nations themselves in closer proximity to such fast-growing markets as Asia.

The petroleum industry has been global in scope for most of its 150-year history. That's not going to change. But there's no arguing that the gradual deconstruction of the nation's refining sector makes it more vulnerable to forces of supply and demand far beyond U.S. control.

While the Strategic Petroleum Reserve (about 725 million barrels of crude, or enough to last about 34 days) is there to dull the impact of a supply crisis, little has been done to ensure the refining sector can endure lengthy disruptions.

Hurricane Katrina's devastating romp through the Gulf Coast's Refinery Row, and the huge spike in gasoline prices that followed, was a stark reminder of how fragile the sector has become. And that was nearly five years ago.

What impact would a similar event have on the struggling U.S. economy today?

-- Jim Jelter

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