PBF offers insight into US, global refining trends

In his address, Mr. O’Malley challenged the audience to consider: Is the US better off with conditions imposed by the 1975 Energy Policy and Conservation Act (oil-export ban) and the Energy Independence and Security Act of 2007 (EISA), which mandated biofuels and ethanol usage?

Both pieces of legislation were enacted to promote energy security measures for the US during periods of high crude oil prices and high import levels. According to Mr. O’Malley, the US still imports crude oil from Canada and Middle East (ME) nations. Back in 1974, the US imported about 3 MMbpd, or 30% of its oil needs. Today, the US imports about 7 MMbpd, or 40% of its crude oil demand. 

More important, is US foreign policy based on crude oil import needs? The political situation in the ME is now more chaotic than in 1974, according to Mr. O’Malley. Such conditions further increase the volatility of energy markets and pricing.

“Lifting the oil export ban will raise prices for US refiners,’ said Mr. O’Malley. 

“The math is simple on this action: Removing export ban = higher oil prices = higher gasoline prices = angry voters.” 

According to O’Malley, the present Congress is not likely to make any changes on the oil export ban.

On pricing. There is a surplus of crude oil on the market and not enough demand, he said. Consequently, crude oil prices are now lower than in the past. “The 2007 EISA was implemented when crude oil prices surpassed $100/bbl,” said O’Malley.  Yet, at $60/bbl there will still be expansion by E&P companies. 

“Low oil prices are a boom for the refining industry and consumers,” said O’Malley.

Lower gasoline prices increase gasoline consumption by consumers, which drives crude oil demand and thus reduces the oil surplus. As a merchant refiner, PBF is enjoying the lower crude oil price environment.

Refining industry. The European refining industry is in a tough place, according to Mr. O’Malley. EU refiners must contend with higher crude oil and natural gas prices, while labor rates are three times the US rate. Competition from new ME refineries will place more pressure EU refiners and force closures. Mediterranean refiners are the most vulnerable to ME refined product imports. More refinery closures are possible in Spain, France and Italy. 

“More important, demand for refined products continues to decline in the EU, said Mr. O’Malley. “The EU’s population and GDP continues to shrink and will impact future energy demand.”

PBF is an Atlantic basin refiner and operates two refineries on the East Coast. Eliminating the export ban would increase oil prices for PBF due to the rules imposed by the Jones Act. 

According to Mr. O’Malley, oil prices for US exports would incur a $1.85/bbl increase for shipping charges. Due to conditions imposed by the Jones Act, domestic refiners could expect a $6/bbl increase just in shipping charges that would be ultimately passed onto consumers. 

Final thoughts. How have the conditions changed for the US refining industry?

“The refining industry is a manufacturing business. The landscape of this industry is changing. In 1980, only 15% to 20% of the industry was operated by nonintegrated companies. Today, 65% to 70% of the US refining industry is operated by non-integrated organizations. That trend will continue; in five years, approximately 85% of the refining industry will be managed by non-integrated companies,” said O’Malley.

“Refiners control only 5% of the cost for crude oil. They have no control on oil prices; no control on the prices of refined products, which are commodity products. They have no control on the market,” said O’Malley. 

“The US reining industry is a great business. It provides numerous high paid jobs along with benefits. It is vital to US security."