Why does refining capacity in the United States affect world crude oil prices?

Question

I have seen this several times already in media reports. They claim that limited refining capacity is partially to blame for increased (crude) oil prices. I can understand that refining capacity would affect prices at the pump, but how is it that it affects world crude oil prices? It would seem that limited refining capacity that would cause limited supplies at the gas pump which would result in less crude oil being used, thus causing higher crude oil supplies. If other countries do not have as limited a refining capacity, wouldn't it make sense that they would have lower prices at their pumps (all else being equal)?

pjallittle, if I understand you correctly, you are saying that the US market is so large, that when the refining capacity goes down, OPEC and other producers react by limiting supply. Even if producers could instantly change their production, this would result in the price of crude remaining the roughly the same. However, instead it used as reason for higher crude oil prices. In other words, if what you are saying is true, the opposite would also apply. So, if refining capacity magically increases in the US, the price of crude oil falls even if demand for crude oil increases? This also does not make sense to me.

Answer 1

The news services are using "refinery capacity" as an answer for rising crude prices. You are correct in your assumption that limited refinery capacity would affect prices at the pump, but not crude prices.

One of the main causes of the increases in crude prices is basically demand. China and India (which have 1/3 of the world's population) are coming online as major energy consumers. These countries are experiencing booming economies and new wealth and their citizenry are demanding all the goods that the west has enjoyed for so long - and this takes energy, thus crude demand is going up.

The second major reason (the one the media won't touch) is the falling US dollar. Since 2002, the dollar has fallen some 34% in value against the major world currencies (about 65% against the Euro). As the dollar devalues, crude prices are going to go up.

Now, people will say "Hey, crude sales are denominated in dollars, thus there is no foreign exchange and a depreciating dollar is irrelevent". That's where they make they mistake. Yes, the majority of crude sales are dollar denominated and there is no foreign exchange on the front end, but there is on the back end. Let me give you an example:

Let's go back in time to 2002 when the EUR/USD exchange rate was 0.84, meaning that 1 Euro was worth $0.84. Now, let's say the U.S. purchases $500 million in crude from Saudi Arabia. Well, the middle east is not an agricultural mecca, they have to import their food - and they import their food from Europe. So, let's say Saudi Arabia buys 500 million Euro in food. With the exchange rate at 0.84, that means that the food would be $420 million - thus Saudi Arabia still has $80 million left. Fast forward to today with the exchange rate at 1.38. If we bought $500 million in crude from Saudi Arabia and then they turn around and buy 500 million Euro in food, that works out to $690 million. Thus as the Dollar is losing value, oil exporting countries have to raise their rates to compensate for the declining dollar as they exchange dollars for Euro's, Pounds, etc., for their purchases.

The one poster that said the Canada is our primary source for crude purchases is correct, but the greenback (US Dollar) has fallen 35% against the loonie (Canadian dollar) since 2002. As Canada will have to convert their USD reserves to whatever currency the country they purchase their imports from, they'll lose money, thus they'd have to raise the rates of their crude oil sales.

One thing you must remember, the media is going to give you some reason for the price rise, but not the truth. The gov't and media don't want you to know about how badly the dollar is depreciating. You are one of the few people using your noodle.

Answer 2

This is not an easy question to answer and I will have to rely on some statistics that are a few years old to explain some of the reasons. Though these are a few years old, the relative standards remain the same and they relate to the oil consumptions of the top 20 purchasers of oil:

United States: 19.993 (4 times more than the 2nd largest consumer)
Japan: 5.423
China: 4.854
Germany: 2.814
Russia: 2.531
South Korea: 2.126
Brazil: 2.123
Canada: 2.048
France: 2.040
India: 2.011
Mexico: 1.932
Italy: 1.881
United Kingdom: 1.699
Spain: 1.465
SaudiArabia: 1.415
Iran: 1.109
Indonesia: 1.063
Netherlands: .881
Australia: .879
Taiwan: .846

First 20 Countries: 59.134
Rest of the World: 16.854
World: 75.988 (now closer to 82,000)
World Annual: 28,460

As the above figures demonstrate, the USA consumption is almost equal to the next 5. When the USA scales down their purchasing because of maintenance programs which temporarily shut down refineries, such as before and after winters or for other reasons, this has a dramatic effect on the oil producing nations which now will artificially make up the difference by boosting the price until the USA comes back on line.

The standards & pricing are set by OPEC Nations.which are:

Member countries of OPEC (Organization of Petroleum Exporting Countries).

Algeria
Indonesia
Iran
Iraq
Kuwait
Libya
Nigeria
Qatar
Saudi Arabia
United Arab Emirates
Venezuela

What few people in the USA realize is that our #1 supplier of crude oil is Canada followed by Saudi Arabia. Canada's oil helps to keep the OPEC countries from really cleaning our clocks.........

The following exhibits in pictorial form where we now stand and the direction in which we are headed as respects use of oil:

http://www.eia.doe.gov/oiaf/ieo/images/figure_34small.jpg

Thus the ebb and flow of supply & demand is influenced very quickly on the world market whenever we decrease our capacity to receive oil because of cutbacks on refining capacities.

Oil: a 400,000 barrel per day (b/d) fall in OECD oil consumption, the biggest decline from that grouping for more than 20 years, underlines the impact of rising oil prices. Prices peaked at more than $78 a barrel in August as the average price of dated Brent increased by nearly one fifth to $65.14 a barrel in 2006. The OECD fall was the main factor behind the weakest global growth rate for oil since 2001, at 0.7 per cent or half the average for the past decade.

Overall global production was up some 0.4 per cent to 81.7 million b/d. Faced with weak demand, Opec cut production late in 2006 for the first time in nearly two years. For the year as a whole, Opec increased its production by an average 130,000 b/d to 34.2 million b/d.

Political considerations within the USA effecting conservation have dramatically had an impact on developing new refineries which are increasingly unpopular.

I do not interject any concepts of oil company conspiracies against the public as some may wish to believe, including some of our politicians who are inherently anti-corporate. These trends have been around for many years, long before George Bush and Dick Cheney, they were prevalent during the Carter Administration and his successor, Ronald Reagan.

I hope this sheds some light on the subject.

Answer 3

Simply the oil companies have banded together ( im guessing ) and they decided to milk the people for everything they got. They used Katrina as the perfect chance to raise by $1 - $2 per. gallon for a bit.

We have plenty of supply but its moreover of them shipping it out to us and everyone else, the refining is fine. In fast the only most "refined" is California due to all the additives ours costs more because it gives us more mileage and its better for the engines.

Answer 4

Why are there so many ignorant people in here asking questions? Oil is priced according to supply and demand. Since OPEC has the most supply they can and do regulate the flow. And what does this mean? "and why not they give it to other countries which are not prone to climate calamity."

Answer 5

United States companies own most of the refineries. US is the major market for crude oil. Even the Saudi's don't own a refinery.

Answer 6

might the job is risky & expensive