1 Imports based on no trade barriers in United States and trade barriers in Japan and Western Europe. 2 "Free Trade" scenario assuming no trade barrier in Japan or Western Europe and Middle East at a rational rate. 270 100 370 The amount of refinery capacity utilized in the United States is shown in Table 7, based on the following scenarios: High imports of light refined products. Medium imports of light refined products. No imports of light refined products. The amount of refinery capacity (expressed as crude distillation capacity) idled and assumed shut down due to increased imports is also shown in Table 7. The idled refining capacity includes downstream and crude distillation capacity. It is expressed here as crude distillation capacity to provide a common reference point. For purposes of analysis, it has been assumed that the shutdowns occur in the same time period as excess capacity. In the past there has been a time lag between the occurrence of excess capacity and refinery shutdowns. The ability of the refining industry to carry excess capacity is directly related to its financial stability. Recently, low and often negative profit margins have resulted in increasing the debt structure of refiners. This has weakened their financial stability and will shorten the lag time between the occurrence of excess capacity and refinery shutdowns. The shutting down of refining capacity will have two serious effects on the United States refining industry: Loss of Jobs.-This will be an immediate effect. Job loss will not be confined to the specific refinery jobs but will have a multiplier effect in the local economy and in the nation as a whole. Loss of Refining Capacity.—This will have an impact over a period of time. Most shutdown capacity will change from idle to unusable in less than 2 years. The jobs lost due to projected refinery shutdowns are detailed in Tables 8 and 9. Shutdown of refinery capacity is calculated based on the difference between capacity utilization in the two import cases versus the no import case. In addition to showing the crude capacity shut down, the complexity of the refining capacity shut down is also indicated. Refinery complexity is an indication of the number and complexity of downstream units compared to the crude unit. From this table it can be seen that these shutdowns represent loss of fairly sophisticated refining capacity. Refinery job losses have been calculated based on the correlation between the refining crude capacity (including adjustment for complexity) and the number of refinery workers. These are direct job losses and have been calculated from two different date sources: Pace.-Developed from Pace's data base which relates refinery jobs to crude distillation capacity times refinery complexity. Other.-Developed from other data bases and also relates refinery jobs to crude distillation capacity times refinery complexity. TABLE 7.-U.S. REFINING CAPACITY UTILIZATION AT HIGH IMPORT LEVEL, MEDIUM IMPORT LEVEL, AND NO IMPORT OF MAJOR LIGHT REFINED PRODUCTS TABLE 8.-U.S. JOBS LOST DUE TO INCREASED IMPORTS OF MAJOR LIGHT REFINED PRODUCTS, HIGH Pace.. Other. Total: 3 750 3,840 3,440 880 4,320 3,460 25,980 8,940 34,920 28,220 3,800 14,410 10,640 3,940 14,580 4,420 21,640 17,280 4,630 21,910 10,110 38,330 28,300 10,480 38,780 11,740 57,550 45,970 12,300 58,270 9,770 3,360 13,130 10,610 3,800 14,410 10,640 3,940 14,580 15,430 3,750 19,180 17,220 4,420 21,640 17,280 4,630 21,910 27,930 9,620 37,550 30,340 10,870 41,210 30,420 11,260 41,680 14,130 10,720 54,850 49,250 12,630 61,880 49,430 13,230 62,660 1 Studies by Texas Department of Water Resources and the John Gray Institute, which are specific to U.S. refining. Projects 13.3 jobs outside per job inside refinery and 5 of the 13.3 in the same SMSA as the refinery. 2 U.S. average job multiplied for manufacturing industry is about 5 jobs lost outside the manufacturing facility for every job lost inside the facility. 3 Based on refinery specific studies OP. CIT. TABLE 9.-U.S. JOBS LOST DUE TO INCREASED IMPORTS OF MAJOR LIGHT REFINED PRODUCTS, MEDIUM IMPORTS VERSUS NO IMPORTS 1 Studies by Texas Department of Water Resources and the John Gray Institute, which are specific to U.S. refining. Projects 13.3 jobs outside per job inside refinery and 5 of the 13.3 in the same SMSA as the refinery. 2 U.S. average job multiplied for manufacturing industry is about 5 jobs lost outside the manufacturing facility for every job lost inside the facility. 3 Based on refinery specific studies OP. CIT. Refinery (direct) job losses result in a multiplier effect of job loss in the total economy. This multiplier is used to determine the indirect jobs lost and has been calculated from the following sources. Texas Department of Water Resources (1983), The Texas Input-Output Model 1979-This study was directed specifically at indirect job loss due to refinery job loss. The factor is 13.3 indirect jobs per direct (refinery) job. John Gray Institute Study.-This October 1984 study was performed by the John Gray Institute of Lamar University, Beaumont, Texas. The study detailed job loss in the immdiate area (SMSA) of the refinery job loss and is 5 indirect jobs per direct job loss. Average for United States Manufacturing industry-This is not specific to the refining industry and is set at 5 indirect jobs per direct (refinery) job. Note that these job losses are not cumulative over a period. There are several important points to note from the tables on refinery capacity shut down and jobs lost due to these shutdowns. These are: Shutdown refinery capacity becomes lost capacity.-Refineries which are shut down even for short periods (6 months to 1 year) with the intention of restarting, would require investment of $200 to $500 per barrel (not including inventory_costs) and take 3 to 6 months to restart. When refineries are shut down due to a cash flow squeeze, it is likely that only minimal_mothballing investments are made. In such a case, startup would be very difficult. In any case, even with maximum expenditure for mothballing equipment, it is unlikely that a refinery shutdown for 1.5 years or more could be restarted. The shutdown capacity represents an inability to produce refined products in the future. In the event of trade disruptions the United States could be as much as 1.4 million barrels per day short of light refined products, regardless of the volume of crude oil in the Strategic Petroleum Reserve. The crude stored in the Strategic Petroleum Reserve will not solve supply problems under a scenario in which the United States has become dependent upon imports to supply 10 to 13 percent of the supply of major light refined products. Thus increased imports of refined products tend to negate the value of the $30 billion investment in the Strategic Petroleum Reserve. Capacity which is shut down in the short term will be required in the long term as demand increases in the future.-Some of the capacity which is shut down now will be required to meet future demands. Job losses in certain regions could be significant.-Loss of jobs in standard metropolitan statistical areas (SMSA) in which refineries are located could be significant. Loss of jobs (due to imports of refined products) in the SMSA's in which refineries are located could be as high as 26,000 jobs. Since United States refineries tend to be concentrated in key areas of Pennsylvania, Louisiana, Texas, California, and Washington, these potential job losses could be expected to affect those regions most. In addition to refinery capacity and job losses associated with shutdowns, there is also the effect of reduced profits when excess capacity occurs. High refined product imports serve to lower United States refinery capacity utilization, resulting in significantly lower profits. In the absence of refinery shutdown, refiners' gross margins-defined as refined product revenue less cost of feedstock-drop $0.92 per imput barrel when high product imports are compared to a no import scenario. This translates to approximately $4 billion in reduced profits for the United States refining industry. BACKGROUND AND BASIS World demand for refined products experienced a healthy growth rate between 1960 and 1980 as shown in the following table: While the growth in the 1970s was not as rapid as occurred in the 1960s, it still exhibited substantial growth, especially in the 1975 to 1980 period. The increase in demand from 1975 to 1980 was in part due to decreasing real prices for crude oil as inflation outstripped oil price increases over most of the period. The disruption of crude supplies resulting from the Iranian revolution brought a rapid increase in the real price of crude and refined products in 1979. The combination of price increase and relatively high growth in demand resulted in high profits for refiners worldwide. Major crude exporters, seeing the increase in refining profits as an additional business opportunity, decided to invest in export refineries. The expansion of export refinery capacity that was planned in the late 1970s and early 1980s represents a bullish view for world refined products demand in the 1980s. The common expectation was that demand would grow at between 2 and 3 percent per year throughout the 1980s. In contrast to the growth in demand in the last decade, demand for refined products in this decade has declined between 1980 and 1984 at the rate of 2.3 percent over the period. This decline was due to the following. Worldwide recession in the 1981 to 1983 period.-since energy demand is primarily a function of economic activity, economic decline results in lower energy use. Consumer response to rapidly increasing energy prices.-The large increase in petroleum prices resulted in substantial shifts in consumption of energy by method such as: increasing efficiency of the automotive fleet, decreasing fuel consumpion in space heating via shifts in thermostat settings, and higher capital investment in heat recovery equipment. As has been implied above, the major factor in determining energy consumption is economic activity. The amount of energy associated with any level of activity is related to the rice of energy. Pace utilizes a macroeconomic model of the United States economy developed by a Pace subsidiary company, Management Technologies, Inc. (MTI). The model uses the concept of "system dynamics," and is based on mathematical procedures developed for modeling feedback control systems. The economic forecast based on the MTI model is shown in Figure 1 for the United States. Also included is a Trend forecast which is based on a consensus of normal trend forecasters' methods. The basic Pace economic forecast, referred to throughout this report as the Cyclical forecast, shows a recession occurring in 1987 with a slow recovery through 1990, followed by rapid economic growth in the 1991 to 1995 period. In contrast, the Trend case shows a fairly steady growth rate throughout the period. The methodology used by Pace to forecast world economic activity is based on the premise that United States economic activity has a direct influence on global economic activity. The major linkage occurs through interest rates. United States short-term interest rates are assumed to determine interest rates worldwide. These short-term rates are the critical factors in determining economic activity. The forecast of world energy demand is based on the economic forecasts for the United States as shown in Figure 2. The forecast, based on eleven world regions, has been aggregated as shown in Figure 3. The forecast indicates the following: Since energy demand is largely a function of economic activity, demand for energy in the Cyclical case shows very low growth in the 1986 to 1990 period, with a sharp increase between 1990 and 1995. While petroleum will remain the largest single source of energy, its percent of total use will decline in the future. This is a continuation of the trend which saw petroleum's share of the total markets drop almost 6 percent between 1978 and 1982. Coal and primary electricity (nuclear, hydroelectric, etc.) will exhibit significant growth over the forecast period. This is due in part to increasing demand for electrical power by the consuming sectors, and partly due to displacement of petroleum by coal and nuclear as boiler fuel in electrical utilities. The forecast refined products demand for WOCA, derived from the total energy demand, is shown in Figure 3. The forecast indicates the following: The 1980s are years of retrenchment for refined products demand. In the Cyclical case, refined products will be below 1979 demands throughout the decade. Even in the Trend case, demand will not exceed the 1979 high until 1989. Distillate exhibits a substantial increase in demand throughout the forecast period and is forecasted to be the largest single demand by 1995. Gasoline demand will grow only moderate at a rate during the forecast. Middle East export refineries The rapid increase in crude oil price in 1979 brought a bonanza of cash flow to both crude producers and refiners. Many of the major crude producing countries had excess capital and were looking for investment opportunities. As a result, many of the crude exporting countries in the Middle East invested in new refining capacity. These investments appeared to be prudent from two points of view: Refining was profitable.-The high demand for refined products during the 1975 to 1980 period resulted in profitable refining margins. Since most forecasts called for increasing demand in the future, it was assumed that refiners would be profitable in the future. Refining is forward integration in the oil industry.-Crude exporters have often viewed the major international oil companies as role models. Entering the refinery business would emulate these companies and was seen as a method for crude producers to increase economic and strategic power in the industry. Middle East existing and planned refinery expansions are shown in Table 10. These expansions are sub-divided into capacity which will be onstream by mid-1986 and after mid-1986. A detailed list of these additions by refinery location is shown in Table 11. These show that the expansions are in the form of complex refinery additions and not merely hydroskimming refineries. The expansion in heavy oil conversion capacity (processing atmospheric residual to produce lighter products) is 302,000 barrels per day excluding visbreaking and atmospheric residual desulfurization, and 570,000 barrels per day when these processes are included. This represents 19 and 35 percent, respectively, of total atmospheric crude distillation capacity additions. Such expansions would indicate a refining configuration designed to produce light refined products such as gasoline and middle distillates (distillate fuel oil, kerosene, and jet fuel). |