Refinery 101: The Basics for State Policymakers
A number of factors make the world of refining complicated and complex. The article supplies basic information on how refineries operate, where they are located, and the general economic, regulatory, and policy challenges facing the industry.
- Nationwide, 137 operating refineries—including the U.S. Virgin Islands—process nearly 19 million barrels of crude oil per day.1
- No new refineries have been built since 1976, and the total number of operating refineries has declined from 254 in the early 1980s as compared to today. Existing refineries, however, have become more efficient and have been able to expand total capacity by more than 800,000 barrels per day, despite having fewer facilities.
- The locations of refineries are demarcated within a Petroleum Administration District for Defense, or PADD, District. At one time, the Department of Defense required refineries to produce and distribute petroleum products within a PADD District in response to Nazi submarine attacks on domestic merchant marine tankers in World War II. These attacks helped precipitate the construction of interstate pipelines to connect the different petroleum markets across the country.
- PADD Districts generally delineate where refineries receive sourced crude oil (see map). PADD 1 on the East Coast depends largely on global crude supplies; PADD 2 in the Midwest and PADD 4 in the Rocky Mountains rely on domestic production and Canadian crude oil shipped via pipeline; PADD 3 in the Gulf Coast has the largest refining concentration, and it receives crude from onshore and offshore domestic production, as well as Mexico and Venezuela; and PADD 5 on the West Coast relies largely on tanker deliveries of Alaskan oil and foreign supply.
- The refining business is highly competitive and profit margins are often very thin. Refineries compete to purchase oil in the global market, thus they are generally considered “price-takers” rather than “price-makers.” In essence, refiners make money off petroleum volume and their ability to manufacture low-cost petrochemicals and other specialty products.
- According to recent estimates by the Department of Energy, the price of crude oil makes up 72 percent of the price of gasoline with refining accounting for 12 percent of the cost. The remainder is comprised of marketing, transportation costs, and federal and state taxes.2
- The refining industry is facing tough economic headwinds due to high prices for crude oil on the global market and decreasing domestic fuel demand, which is down 6 percent from 2007 levels.
- Refineries on the East and West coasts—PADDs 1 and 5—rely more heavily on imported Brent crude oil, which is often referred to as the world price of oil. U.S.-produced barrels are more closely tied to the benchmark pricing of West Texas Intermediate crude, which is trading nearly $20 a barrel cheaper than Brent crude prices.3 Thus, refiners in the Midwest and South have greater access to cheaper sources of crude oil.
- Further, advanced refineries in the Midwest and South that can process “heavy” crude oils and those that can produce more diesel from a barrel of crude oil are inherently more profitable because their capabilities allow them to serve more markets with additional products.
- In contrast, refinery and fuel markets in the East Coast could face real peril. Three refineries are expected to close this summer, including the region’s largest that produces 335,000 barrels per day, because of poor economic returns. If all three facilities shutter, more than half the Northeast’s refining capacity will be gone. At press time, Delta Airlines announced plans to purchase the Trainer refinery, which produces 185,000 barrels per day.
- Refining is an energy-intensive process and consequently, are major sources of harmful air emissions called “criteria pollutants” under the Clean Air Act. Many advocacy groups have raised concerns that refineries unduly impact local communities causing significant environmental justice and public health problems.
- Refiners contend that many of the ills facing their industry are results of poor federal and state policy. They cite expanding Clean Air Act regulations, additional requirements to remove sulfur from gasoline, expansion of biofuel mandates, greenhouse gas reduction rules and myriad boutique fuel requirements as having played a significant part in the closure of nearly 70 refineries over the past 20 years.4
- Labor laws like the Merchant Marine Act—or “Jones Act”—prevent foreign-flagged vessels from delivering fuel between U.S. ports. The refining industry has suggested this prohibition prevents it from buying cheaper domestic crude oil in the Gulf Coast due to a lack of sufficient U.S.-flagged vessels, which drives up the cost of business— especially in the Northeast where pipeline capacity is very limited.
- Domestic shipping companies that see the provisions as crucial to maintain a healthy domestic fleet strongly oppose temporarily waiving the Jones Act.
1 Energy Information Administration (EIA). “Number and Capacity of Petroleum Refineries.” 2011.
2 Energy Information Administration. “Gasoline and Diesel Fuel Update.” April 16, 2012.