SIC 2911
PETROLEUM REFINING



This category covers establishments engaged primarily in producing gasoline, kerosene, distillate fuel oils, residual fuel oils, and lubricants through fractionation or straight distillation of crude oil, redistillation of unfinished petroleum derivatives, cracking, or other processes. Establishments primarily engaged in producing natural gasoline from natural gas are classified in mining industries. Those manufacturing lubricating oils and greases by blending and compounding purchased materials are classified in SIC 2992: Lubricating Oils and Greases. Establishments primarily engaged in manufacturing cyclic and acyclic organic chemicals are classified in various chemicals and allied product manufacturing industries.

NAICS Code(s)

324110 (Petroleum Refineries)

Industry Snapshot

The U.S. refinery industry, with shipments valued at $200 billion in 2001, continues its path toward consolidation and cost efficiency in the face of price instability and tightening environmental regulations. From 1990 to 1999 the number of operable refineries in the United States declined 22 percent, while capacity held steady with late 1980s levels. In 2002 the 159 operable refineries had a total operating capacity of 16.26 million barrels per day, a quarter of the world's capacity.

Price instability plagued the overall oil business in the late 1990s and into the early 2000s. From historic low prices in 1998 and early 1999, when oversupply dragged crude oil prices below $10 a barrel, a Depression-era low when adjusted for inflation, OPEC's production cutbacks during 1999 and 2000 caused oil prices to surge, leading to high profit margins for refineries in 2000 and 2001. Tensions in the Mideast, culminating with the U.S. attack on Iraq, caused oil prices to spike as high as $40 per barrel in early 2003 before returning to the mid-$20s. In December 2002 a strike by workers in Venezuela, which provides 14 percent of U.S. crude supplies, caused refineries to reduce throughputs, causing tightening supplies and increased prices.

A traditionally volatile industry, refining has seen a significant change in the industry's composition during the early 2000s as "Big Oil" gradually gives over market share to independent refiners. After a frenzy of deals in 2001, the pace of mergers and acquisitions slowed in 2002 as margins tightened.

Organization and Structure Downstream. The process of turning crude oil into refined products, the "downstream" side of the oil business, involves several key participants and cannot be fully understood without a rudimentary knowledge of the "upstream" side of the oil business, the process of obtaining crude oil. Upstream operations consist of exploration, geological evaluation, and the testing and drilling of potential oilfield sites; that is, all of the procedures necessary to get oil out of the ground (see SIC 1311: Crude Petroleum and Natural Gas ). Downstream operations include pipelining crude oil to refining sites, refining crude into various products, and pipelining or otherwise transporting products to wholesalers, distributors, or retailers.

Because many downstream companies are subsidiaries of conglomerates that also maintain upstream subsidiaries, the sale of raw materials to refiners is often essentially a transfer of products between different operating units of the same corporation. Petroleum refiners, therefore, often depend on the upstream arms of their parent corporations for supplies of crude, and, in turn, supply wholesalers (who then sell to independent retailers) and retailers (company-owned gasoline stations, for example) that are also part of the same corporation. All major oil operating in this system are known as "integrated oil companies" and non-integrated companies are often referred to as "independents."

This tendency toward massive, integrated supply systems affects the oil industry and refiners in that any shift in condition at any point in the crude-to-product chain is felt equally at all levels; economic trickle-down, as it exists in other industries, offers no stabilization.

Processes and Terms. Petroleum refineries turn crude oil into a variety of intermediate forms that are then used in a wide range of products from asphalt to plastics. All products begin in much the same way: with the distillation, or vaporization, of crude. Distillation begins when crude oil boils; components within crude condense at different rates and so are extracted at progressive points along a time/temperature continuum. Lighter, high-value products—propanes, butanes, gasoline, jet fuel—condense at lower temperatures while heavier compounds require high temperatures or a special extraction method to be transformed into such products as diesel fuels, heavy fuel oil, and asphalts. The components of distillated crude vary according to the make-up of the raw crude, with some batches containing large amounts of sulfur, for example, while others may be bituminous and full of heavier compounds.

Before distillation, crude is stored in groups or "farms" of steel tanks. Distillation then occurs in a fractionating tower, in which the various fractions, or portions, of the crude are separated. The "straight runs" obtained in the fractionating tower are treated in secondary stages to create final products.

Some secondary processing involves simple heat and pressure manipulations, while others include complex chemical reactions. Thus not all refineries are capable of all processing techniques. Some of the most common processes include coking, which creates gasoline and gas oils from the heaviest molecules of the crude. Catalytic cracking uses heat, pressure, and a chemical catalyst to double the gasoline yield in a barrel of crude by converting heavy cuts to lighter products. Hydrocracking uses hydrogen to make 100 percent gasoline from the light gas oils that catalytic cracking and coking produce. Hydrofining removes sulfur from the crude, making a cleaner-burning base fuel and allowing the sulfur to be sold as a byproduct. Reforming rearranges molecules in a low-octane gasoline to produce a higher octane. Alkylation enlarges propane and butane molecules, allowing them to be mixed with gasoline.

From these processes emerge products that can be sorted into three main headings. Gas and gasoline, or "white" products, which comprise the lighter end of the barrel, usually about 20 percent of the total yield, are used for automobile gas, aviation fuel, and feedstocks for petrochemicals. Middle distillates, the middle quarter of the barrel, yield kerosene and light gas-oil, heating oil, diesel oils and waxes. Fuel oil and residuals, comprising the heaviest, bottom 55 percent, make up heavy fuel oils—for use in power stations and ship furnaces—asphalt and bitumen.

Petroleum products have a wide variety of uses. Solvents, for example, go into ink, oil-base paints, dry cleaning solutions, rubber cement, and metal cleaners. Sodium hydrosulfide improves paper pulp and tans leather, while organic chemicals serve an entirely, separate spectrum of uses as petrochemicals.

Ethylene, the largest-volume organic produced in the United States, goes mostly into fabricated plastics but is also used in antifreeze, synthetic fibers and rubbers, and detergents. Propylene has several chemical offshoots that are used mainly in film, packaging, and fibers. Butadiene goes primarily into synthetic rubber, but it is also used in ABS resins, latexes, and nylon fibers.

Aromatics, including benzene, toluene, and the xylenes, are primarily useful as blending agents in gasoline, as well as in increasing the octane rating of unleaded gas. Methanol is traditionally used in formaldehyde, acetic acid, solvents, and polymers for adhesives, fibers, and plastics. But in years to come, methanol is likely to be in greater demand to make the oxygenate MTBE (methyl tertiary butyl ether). MTBE, used since 1979 when lead additives began to be phased out, is a component of reformulated gasolines in cities designated by the Clean Air Act of 1990. Its use grew rapidly during the 1990s in the effort to comply with air-quality standards; however, by the late 1990s it was found to contaminate ground-water and was being phased out in states like California.

Product yields per barrel have shifted with demand. In 1981, 10.4 percent of a barrel went toward residual fuel oils, only 6.7 percent was used in such fuel oils in 1991. Moreover, while 7.6 percent of a 1981 barrel went for jet fuel, 10.3 percent of a 1991 barrel was used in jet fuel. This trend should continue, and may become more pronounced, as various emissions regulations are adopted. Federal requirements for low sulfur diesel fuel and reformulated gasoline should change the yield of a barrel of crude; at the same time, wastewater and toxic solids limitations will change the methods of obtaining yields.

Financial Structure. Once crude oil has been refined, its products may be sold as raw materials to other manufacturers, such as plastics or pharmaceutical companies. Other products may be in a final, packaged form and destined for retail sale in service stations or chemical companies.

Within an integrated oil company, a refinery's profits then are part of the total profits made on the front-end. Its ability to compete depends entirely on efficient production without excessive expenditures so that retail prices can remain low. Like the supply side interdependency of integrated oil companies, integrated profit margins are cumulative. They must absorb the costs of every aspect of the oil business, including geological research, refining procedures, and trucking the finished product, to show real net gain.

For refiners operating independently, turning a profit traditionally rested in purchasing crude at low enough rates to allow final product levels to match those of the integrated oils. Free from the overhead of exploration and test drilling, independents were able to compete effectively for years simply by taking advantage of plentiful, cheap supplies of crude. However, the increasingly stringent environmental requirements of the 1980s and 1990s put independents at a distinct disadvantage. Even with low crude prices, facility upgrading cut deeply into revenues and forced profit margins to fall.

Competitive Structure. The U.S. industry is made up of integrated international oil companies, integrated domestic oil companies, and independent domestic refining/marketing companies. Like the oil business in general, refining is dominated by integrated internationals, specifically a few large companies such as BP Amoco, Exxon Mobil Corporation, and Chevron Corporation.

Of the nonintegrated refining companies—independents that focus exclusively on refined goods production and marketing—Marathon Ashland and Tosco stood out as major players. However, no independent companies competed on the same level as any integrated international in terms of net profits or refined goods sold.

Capacity also distinguishes leading refiners as arms of integrated oils. Exxon Mobil, BP Amoco, and Chevron have more than one million barrels per day capacity, with Marathon Ashland and Tosco trailing them closely. In 1999 the top ten refiners controlled an estimated 58 percent of U.S. capacity; this proportion was expected to rise when announced mergers and joint ventures were factored in. At that time around 30 U.S. companies had capacities of 100,000 barrels per calendar day (b/cd) or greater.

As the costs of upgrading refineries escalates, the difficulties of small refining operations will probably intensify. Only with mass infusion of capital can existing refineries remain viable, and only large integrated oils have cashflow to divert. Even the majors struggled: Shell, once the largest U.S. refiner in terms of capacity, has allied nearly all of its U.S. refineries in joint ventures with Texaco and others. Many believe that upgrading and compliance costs will continue to shift the competitive structure of the American refined petroleum products market toward an oligopoly by integrated internationals.

Background and Development

The use of semi-refined fossil fuels dates back several millennia. Six thousand year-old inscriptions in Mesopotamia include descriptions of oil and asphalt used as waterproofing materials. Egyptians embalmed their dead in asphalt, and Romans wrote by the light of oil lamps and drove chariots with wheels lubricated by crudely refined greases.

Early Development. The invention of the kerosene lamp by Dr. Abraham Gesner of Pittsburgh prompted the formation of the Pennsylvania Rock Oil Company in 1854. During this time Americans sought alternative lamp fuels in response to a shortage of whale oil. Dr. Gesner extracted his "improved illuminating oil" from coal, but his methodology proved invaluable to petroleum refining's founding father, Benjamin Silliman, Jr., who wrote a treatise on the chemistry of petroleum in 1855 and then promptly figured out how to distill it. Steam was introduced into the distillation process in 1858. In 1860, the first semi-continuous refining system, operating in a battery of stills, was patented by D.S. Stombs and Julius Brace of Virginia. Luther Atwood cracked petroleum later that year, and Jean Lenoir then produced a three horsepower motor, which ran on benzene. The first full-fledged refinery began production in 1861 near Titusville, Pennsylvania, adjacent to the site where Edwin Drake and W. A. Smith had discovered the first producing oil field in the country at Oil Creek. The refinery churned out little except kerosene; contemporaneous demand for lubricating oils and greases wasn't high enough to keep anyone in business, and petroleum as a transport fuel was still several decades away.

Julius Hock's invention of the noncompression petroleum engine in Vienna in 1869 perhaps marked the beginning of the modern refining process, as engine fuel would become the primary vehicle for petroleum markets worldwide. "Horseless carriages"—powered by burning hay, steam, or electricity until Frank and Charles Duryea built the first gasoline-powered automobile in 1892—eventually became the channel through which refined petroleum captured public attention. The internal combustion engine suddenly brought petroleum to a pinnacle of economic significance.

Industrial Age. In the early part of the twentieth century, new technology was developed in petroleum-driven locomotion; automobiles, airplanes, and military vehicles proliferated as petroleum exploration and refining outpaced itself annually. Intense demand for petroleum products during World War I led to production facilities that would continue to produce innovations even after the war; solutions to agricultural, industrial, and transportation problems came with each new piece of understanding about the capabilities of a barrel of crude. Even food supply was drastically affected, as gasoline powered tractors enabled farmers to increase their productivity, and asphalt surfaces on highways allowed diesel-powered trucks to speed goods to market.

World War II also prompted an upsurge in refining capacity, yielding subsequent massive peacetime productivity. American consumers during the 1950s demanded large, stylish automobiles, warm houses, and air travel. For nearly three decades, Americans found uses for more refined petroleum. The "more is more" credo became refining's byline; a constant, steadily increasing demand for new products was met by the constant, steadily increasing supply of new crude oil supplies. Unfettered by environmental controls or financial limits, refiners expanded and enjoyed a long, golden age of prosperity.

Oil Crisis. Then, in 1973, a political crisis in the Middle East spurred a severe recession and highlighted the extent to which America had become dependent of foreign oil supplies. Furthering the crisis, the overthrow of the Shah of Iran in 1979 precipitated a series of supply interruptions and price increases. Overcompensating for the shortages brought on by Iran's domestic turbulence, refiners misjudged the oil demand for the early 1980s. While worldwide refining capacity increased tenfold between 1938 and 1981, "more is more" no longer held true, and in the 1980s refiners faced a loose market with substantial excesses in place.

Trends in the 1990s. Refiners entered the 1990s burdened by unpredictable supply and demand factors and the potential business consequences of the burgeoning environmental movement. Such issues as recycling, air quality, global warming, and water pollution were high on America's legislative agenda. Consequently, the business strategy of refiners shifted toward finding cleanerburning, more efficient fuels for smaller cars, as well as finding more environmentally friendly ways in which those fuels could be created.

A mild recovery in demand for refined goods could not alleviate the strain refiners experienced in the early 1990s due to unimproved profit margins. Reduced operations, refinery closures, and low sales characterized a gloomy market. The 1991 recession had taken its toll, and the industry was braced in anticipation of new federal manufacturing standards. These new standards, prompted by a growing concern for the environment, meant that depressed market conditions were compounded by rigorous, expensive mandatory upgrading.

Petroleum refining, like the rest of the oil industry, saw profits dwindle to a five-year low in 1992, while spending on refining simultaneously rose 8.3 percent in an effort to meet costs of upgrading and research into alternative processing. Moreover, the recession had prompted shutdowns totaling 114,850 b/cd capacity and had dampened domestic refined product consumption.

Profit margins remained subdued for most of the decade but improved overall toward the late 1990s. Among large refiners tracked by the U.S. Energy Information Administration, refined product margins rose from a meager $0.77 a barrel in 1994 to a modest $1.58 a barrel in 1998. During that period marketing costs were cut substantially, while energy and other operating costs fluctuated.

Environmental Regulation. Environmental legislation and regulations have had a significant impact on the industry. The Clean Air Act of 1990 required that America's 39 smoggiest cities substitute oxygenated gasoline for winter use beginning in November 1992. By 1995, the country's nine smoggiest cities—Baltimore, Chicago, Hartford, Houston, Los Angeles, Milwaukee, New York, Philadelphia, and San Diego—were to have implemented its Phase I specifications. Phase I stipulated that oxygenates (MTBE) be substituted for aromatics (which do not burn completely) in octane enhancers, essentially prescribing a complete reformulation of automotive gasoline.

The new gasoline must have a minimum oxygen content of 2 percent by weight, a maximum of 1 percent benzene by volume, a maximum aromatics content of 25 percent, and no heavy metals. It must not cause an increase in nitrogen oxide emissions and must create lower tailpipe emissions of volatile organic compounds and toxic air pollutants (relative to a baseline of 1990 summertime gasoline). The cost to refiners of implementing substitutions and reformulations prescribed in Phase I was estimated to run $3 billion to $5 billion.

Furthermore, the California Air Resources Board (CARB) instituted standards exceeding those of the Clean Air Act, requiring them to be met by 1996. Some analysts predicted the CARB standards would eventually replace Clean Air standards nationwide.

Estimates for upcoming compliance costs for U.S. refiners fall within the $20 billion range, as four more major amendments of the Clean Air Act come into play. In October 1993 ultra low-sulfur diesel fuel (.05 percent by weight) was to be required nationally. January 1995 marked the deadline for nationwide Stage I gasoline reformulation, and Stage II should have been met by January 1997, requiring adherence to a "complex" model as opposed to Stage I's "simple" model. January 2000 was to see an additional 10 percent reduction in organic compounds and air toxins from the 1990 baseline fuel, with no increase in nitrogen oxides.

In 1999 the 159 operating U.S. petroleum refineries produced an average of 8.0 million barrels of gasoline per calendar day (b/cd), 1.6 million b/cd of jet fuel, 3.4 million b/cd of distillate fuel oil, and 700,000 b/cd of residual fuel oil, according to figures published by the Energy Information Administration. Gasoline typically supplies around half of the industry's revenue. Excluding closing stocks, total U.S. demand for refined petroleum products was estimated at 19.44 million b/cd that year, or 9.7 percent above 1995 levels and 14 percent above 1990 levels. Demand was forecast to reach 19.95 million b/cd by 2001, a 2.6 percent volume increase over 1999.

Price Volatility. Oil prices remain a thorny issue for refiners. The late 1990s price volatility was brought on primarily by OPEC policies and softness in world oil markets. Prices tumbled in 1998 when OPEC producers failed to curb their crude oil output despite recession in Russia and parts of Asia and South America. With heavy supply and light demand, prices sank to levels not seen in decades. According to one analyst, the 1998-1999 low reached Depression-era levels when adjusted for inflation.

In early 1999, however, OPEC ministers agreed to limit production in order to cut crude oil supply and resuscitate prices. Within months, prices more than doubled, surpassing the Gulf War nadir of 1990. They remained high into 2000. This, in turn, provoked diplomatic efforts to get OPEC to raise output and stabilize prices. U.S. crude imports were expected average more than $21 a barrel through at least 2001.

Oil companies, including refiners, can be hurt by both low and high prices. In general, low prices benefit downstream business (refining and marketing), whereas high prices benefit upstream operations (exploration and production). Thus, low prices tend to hurt integrated companies most, as their exploration and production operations yield less revenue—and usually profit—on the oil they extract. Meanwhile, high prices tend to squeeze refiners because they must pay more for crude, and especially amid price volatility, they have trouble passing higher costs on to customers. The process is complex, though, since inventories and other factors can alter individual companies' results.

New Environmental Measures. New environmental laws and regulations continue to challenge the industry. January 2000 marked the introduction of the EPA's Phase 2 regulations for reformulated gasoline (RFG) under the Clean Air Act Amendments of 1990. The second phase continued the EPA's requirement that gasoline contain at minimum 2.1 percent oxygen by weight and no more than 0.95 percent benzene by volume. Going further, it mandated that gasoline provide greater reductions in vehicle emissions of toxic air pollutants, volatile organic compounds, and nitrogen oxides.

Refiners achieve these specifications by formulating their products in different ways, and the changeover can involve considerable cost. In 2000 the U.S. market for Phase 2 reformulated gasoline (RFG) was estimated at 34 percent of total gasoline demand, although the penetration rate varied widely by region. Because not all areas are legally required to use RFG, getting the proper formulation to the correct market can also create logistics costs and challenges for oil marketers.

Meanwhile, even as refiners ramped up operations to produce RFG that complied with the regulations, an unintended side effect of boosting oxygen in gasoline was creating separate environmental worries. Research found that a leading oxygenate, methyl tertiary butyl ether (MTBE), was contaminating groundwater. The pollution was apparently nonlethal but nonetheless troublesome. In 1999 California's governor reacted by banning MTBE effective 2002; other states and the federal government were considering restricting it as well. Abraded by the turnaround on MTBE, which would likely mean another round of expensive refinery upgrades, industry officials pressed for more time and research before MTBE is banned outright.

One of the most controversial new regulations, also issued by the EPA as part of its implementation of the Clean Air Act, is about sulfur content in gasoline. Under so-called Tier 2 requirements, in 1999 the EPA followed another California initiative that reduces sulfur in gasoline by almost 90 percent. The new regulation, to take effect in 2004, was expected to cost the industry $3 billion to $5 billion to implement. Industry representatives had advocated a more gradual, targeted switch to low-sulfur blends, citing the costs and "unproven technology" involved in the conversion. One industry executive estimated that meeting the new RFG and sulfur regulations would cost the industry upwards of $10 billion.

Current Conditions

The refinery industry suffered through periods of extremely poor margins in late 2001 and throughout 2002, caused by the sudden decline in consumer activity and air travel following the terrorist attacks of September 11, 2001. However, by the first quarter of 2003, refining margins were once again strong, running well above break-even. In March 2003 price margins averaged $5.57 per barrel, a dollar above the fourth quarter in 2002 and two dollars higher than the first quarter of 2002. The Venezuelan strike, which reduced production in the country's government-owned plant from 3 million barrels a day to just 400,000, limited crude supply, especially along the Gulf Coast. Heavy maintenance schedules (which reduced supply) early in the year and the war with Iraq also contributed to refineries' strong margins. However, murmurs of suspicion regarding price manipulation and deliberate withholding of supply were also heard.

Refining is a volatile business, with wide and frequent swings in profit margins. Global Markets explained: "Refining is above all cyclical. Cash flow varies with runs and, more dramatically, with margins. When product stocks are low and throughputs near capacity, margins soar amid bottlenecks and price spikes. But a small capacity surplus is enough for margins to collapse, leaving only efficient refiners earning a profit." Poor margins in 2001 prompted both BP and Shell to reduce their refinery numbers. In fact, Big Oil's market share has fallen from 52 percent in 1990 to 36 percent in 2003.

Increasing environmental regulations make refineries a highly capital-intensive industry. As a result, no new refineries have been built in the United States since the 1980s, and none are planned for the future. Rather, facing new environmental standards for clean fuel, an estimated 8 to 12 plants are in serious danger of closure. Standard compliance costs refineries significant money, but they get no return on the investment. John Lofstock and Mitch Morrison noted in Convenience Store News, "Refiners have sunk hundreds of millions of dollars in capital expenses that will yield little, if anything, in improved margins. Essentially, the environmental rule is pay to play. The question is whether the game is worth playing anymore."

Industry Leaders

Exxon Mobil. By refining volume, the biggest U.S. petroleum refiner in 1999 was Exxon Mobil Corporation, which output an average of 1.93 million barrels of refined products per day from its U.S. plants. And its U.S. production amounted to just one-third of Exxon Mobil's global refinery throughput. The company was formed by a merger that took effect that year between two of the world's largest integrated oil companies. Revenue from all operations in 2002 totaled $187 billion; however, only a fraction of that came from U.S. refining.

Exxon was created in 1934 by the merger of Standard Oil Company of New Jersey and Anglo-American Oil Company Ltd.; it took Exxon as its name in 1972. Exxon spent much of the 1990s reeling from bad publicity and large payouts surrounding a massive 1989 Alaskan oil spill by its Valdez tanker. Mobil evolved from two other spin-offs of Standard Oil, Standard Oil of New York and Vacuum Oil, adopting the Mobil name in 1976.

BP p.l.c. Formed by another weighty merger of the late 1990s, BP (formerly BP Amoco p.l.c.) was second in 1999 U.S. refinery capacity and throughput. The oil giant was formed in 1998 when British Petroleum and U.S. based Amoco merged. U.S. refineries of the London-based company reported in 1999 average daily throughput of 1.34 million barrels, down 10 percent from a year earlier. Worldwide throughput that year fell 6.5 percent, to 2.52 million b/cd, although the U.S. pullback accounted for most of that decline. The company attracted headlines in 1999 when it proposed to buy Atlantic Rich-field Company (ARCO), a move opposed on anticompetitive grounds by a sharply divided Federal Trade Commission (FTC). BP Amoco reported revenues of $178.8 billion in 2002.

ChevronTexaco Corporation. California-based ChevronTexaco was the third-largest U.S. refiner in 1999. That year it sold 1.30 million b/cd of products from its U.S. refineries, with volume up 4.7 percent from 1998. Chevron's seven U.S. refineries supplied 59 percent of its refined product volume worldwide. Chevron merged with Texaco in October 2001, upping its refineries to 23 locations worldwide.

Workforce

Employment in the refinery business has declined with technological advances, corporate consolidation, and movement of operations overseas. In 1999 refiners employed 92,000 workers in U.S. operations, a decline of 12 percent since 1995 and 22 percent since 1990. By 2001 refinery employment levels had fallen to 80,690, according to the U.S. Department of Labor, Bureau of Labor Statistics. In 2001 28 percent of the industry's employees were production workers, and they earned an average of $21.63 an hour.

Within refineries, operators and craftsworkers monitor products via computers. They analyze data and make adjustments to machinery to ensure optimum yields, repair faulty equipment, and make statistical reports on output. Mechanical engineers work closely with operators, developing new machinery and making improvements whenever possible. These highly skilled technicians and scientists are the core of all refineries' staffs.

America and the World

Refining, as with the broader oil industry, is highly internationalized in many respects. Most large oil companies have considerable holdings in multiple regions of the world, and some, like Exxon Mobil and BP Amoco, derive greater revenues from international operations than they do in their home markets.

Because of its strategic importance and other factors, the oil business in some nations has close ties to government agencies; in some places petroleum upstream and downstream activities are performed by government owned corporations or regulated monopolies. As international trade liberalization and related political and economic forces have gained sway, a trend toward privatizing government monopolies has impacted the oil business in a number of countries. Many major national systems being privatized in the early 1990s were inspired by Mexico, whose president, Carlos Salinas de Gortari, used privatization as one method to turn around his country's flagging economy. Although it shortly suffered a serious economic setback for other reasons, Mexico has been viewed by some as a lesson in the ills of planned economies and the virtues of market controls.

In 1993, the Italian state petroleum holding company Ente Nazionale Idrocarburi began to unfold one of the largest privatization programs ever. Most key oil producing nations in Latin America, growing economies in the Asia-Pacific region, and much of western Europe, were all in various stages of privatization in the early 1990s, depending on freer markets to sustain their national economies.

Members of the European Community (EC) faced challenges in both their individual privatization efforts and their collective energy legislative programs. For example, when EC efforts to reduce excess capacities required that England streamline some operations, the English public protested, claiming that mass unemployment in already-depressed areas would follow. Government systems were thereby forced to continue supporting unprofitable operations.

The situation in England highlighted the reason that nationalized petroleum may become an industry of the past; because of the decidedly global nature of petroleum markets, national systems might not be able to compete, once a majority of producer/refiners become private industries. As more organizations adopt efficient, profitmotivated structures, the standards for products worldwide may begin to resemble those in the United States in terms of stringent environmental standards. If so, the American market may become accessible to foreign competition.

There has already been a long history of joint venture and investment in the United States by refiners based overseas, and some of the integrated internationals that dominate in the United States are based in foreign countries, such as the Royal Dutch/Shell Group and British Petroleum.

The state energy companies of several OPEC countries, particularly Kuwait, Saudi Arabia, and Venezuela, invested heavily in U.S. downstream capacities in the early 1990s. Petreolos de Venezuela S.A. (PDVSA, the state petroleum company of Venezuela and Saudi Arabia) acquired the remaining 50 percent interest in Citgo Petroleum in 1991, becoming the full owner of this subsidiary. Star Enterprise, a 50/50 petroleum refining and marketing joint venture between Saudi Arabia's Aramco and Texaco, began operating in 1989. And Delta International, another state-owned Saudi company, began negotiating a joint venture with Fina Oil and Chemical, the U.S. subsidiary of Petrofina, a Belgian firm, for its U.S. refining and marketing operations. Furthermore, the as yet unprivatized Pemex Corporation of Mexico acquired a 50 percent interest in Shell Oil's Deer Park, Texas, refinery and began negotiations with other Gulf Coast refiners.

The increasingly complex subsidiary networks of integrated internationals should link many refineries in the United States in the next decade. As the global economy shrinks and ties between nations become stronger, the already cosmopolitan arena of petroleum refining will know increasingly fewer political borders. Consequently, American refiners may compete more directly with foreign firms for markets both at home and abroad.

Research and Technology

Although new advances in reformulating gasoline, substituting cleaner fuel bases, and eliminating production waste represent significant innovations in the industry, perhaps the most important revolution in petroleum refining technology involved the implementation of computers. In the early 1990s, distilling and manufacturing industries relied on mainframes that could record, compile, and recall data on all elements, from viscosity to sulfur levels, in any given barrel of crude. Everything from measuring proportions of ingredients to monitoring chemical reactions could be performed with computers, and engineers relied as much on three-dimensional graphic and diagramming software as on actual valves and gages to determine improvements in processes.

With upstream technology breakthroughs such as 3-D seismography, horizontal and directional drilling, and enhanced oil recovery (EOR) helping to ensure that every drop of oil was pumped from the ground, the impetus to utilize every drop of oil at maximum efficiency had never been stronger. Computers allowed such efficiency not only by storing and retrieving data in a central, accessible medium, but also by cutting the time required for compilation and computation. Moreover, by implementing self-cleaning machines monitored by more sophisticated computers, petroleum refiners should be able to produce the low-toxicity fuels in demand and eventually find new areas for growth.

Nevertheless, patience, thrift, and ingenuity will be paramount to survival in the refining industry. Demand for petroleum products is forecast to grow at only half the rate of the U.S. economy. New regulations will limit the use of products that once had diverse applications, restricting them by season, geographical area, applications, and production costs. Federal standards requirements are likely to continue to proliferate, absorbing time and capital and human resources for research and experimentation.

Further Reading

Adler, Kevin. "Year Ends with Many Issues Still Unsettled." World Refining, December 2002, 1.

Beck, Robert J. "Resurgent Oil Demand, OPEN Cohesion Set Stage for Optimistic Outlook for the Oil Industry at the Turn of the Century." Oil and Gas Journal, 18 October 1999.

"Downstream Woes Hit BP and Shell." Global Markets, 6 May 2002, 4.

"Expansions, Mergers Boost U.S. Refining Capacity 6 Percent Over Two Years." Oil Daily, 29 June 1999.

Frank, J. Louis. "New Mandates Present Fuel Challenges for U.S. Refiners." Oil and Gas Journal, 13 December 1999.

"Global Profit Squeeze." Global Markets, 2 December 2002, 1.

"An Integrated Component." Global Markets, 6 May 2002, 1.

Kronenwetter, Eric. "Industries Bemoan EPA Stand on New Diesel." Oil Daily, 4 November 1999.

"Landscape of U.S. Downstream to Shift Again—But When?" International Petroleum Finance, January 2003, 3-4.

Leffler, William L. Petroleum Refining in Nontechnical Language. 3rd ed. Tulsa, OK: Pennwell, 2000.

Lofstock, John, and Mitch Morrison. "Supply Swing: Independent Refiners are Growing Their Market, But Can They Meet the Nation's Fuel Needs?" Convenience Store News, 3 March 2003, 15-17.

"Prudential Securities, Inc." The Oil and Gas Journal, 6 January 2003, 7.

Quinlan, Martin. "Profits Collapse, Again." Petroleum Economist, September 2002, 24-27.

U.S. Energy Information Administration. Annual Energy-Outlook. Washington, DC: 2000. Available from www.eia.doe.gov .

——. Short-Term Energy Outlook. Washington, DC: February 2000. Available from www.eia.doe.gov .

"U.S. Refiners Slash Throughputs." Global Markets, 27 January 2003, 20.

"U.S. Refining Margins Remain Strong." The Oil Daily, 18 March 2003.

Weisser, Cybele. "The New World of Oil." Money, 1 May 2003, 50.



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