By John Kemp
LONDON Jan 13 It is a great time to be an oil refiner, at least if you are located in the central United States and have access to light oil from North Dakota's Bakken formation and similar crudes trapped in the region by transport bottlenecks and the export ban.
While refiners in Western Europe struggle with overcapacity in the global refining system and face pressure to close some of their facilities, their rivals in the United States are benefiting handsomely from locational advantages and outdated protectionism.
Valero Energy Corporation, the largest pure refiner in the United States, has seen its stock price almost quadruple from $14 to $53 since August 2010.
The refiner has benefited from buying stranded domestic light crude at steep discounts while selling gasoline and diesel at prices linked to international benchmarks.
While all of Valero's refineries have reported good throughput margins since late 2010, the company's three refineries in the midcontinent area (Ardmore, McKee and Memphis) which process mainly light crudes from inland areas have been by far the best performers (Chart 1).
Throughput margin measures the difference between the purchase price at which refineries buy crude and other feedstocks and the price they achieve for the sales of their products such as gasoline and diesel.
For most of 2011, 2012 and 2013, Valero's midcontinent refineries were achieving throughput margins of between $10 and $22 on every barrel of oil they processed, according to Valero's own quarterly operating reports (Chart 2).
Refineries in the midcontinent achieved far higher throughput margins than those on the coasts, where crude acquisitions are more closely tied to international benchmarks like Brent.
Midcontinent refineries account for under 20 percent of Valero's total throughput but they process almost entirely light sweet and sour crudes from domestic oil producers who have nowhere else to sell their output and the refineries have contributed disproportionately to the company's profitability in recent years.
Valero is a good proxy for other refiners with midcontinent assets. Others have also been highly profitable thanks to transport constraints and the export ban.
In the first nine months of 2013, midcontinent refineries contributed almost 36 percent of Valero's operating income from refining, despite processing just 16 percent of the crude oil and other feedstocks.
The midcontinent refineries made similar outsized contributions to income in 2012 and 2011, according to the company's financial statements.
So it comes as no surprise that Valero has been the first refiner to speak out in favour of retaining the U.S. ban on crude oil exports.
"It makes more sense to keep crude oil here in the U.S.," a company spokesman said last Tuesday. The current export controls, which largely prohibit exports of unrefined crude except to Canada, are "working well", he added.
The export ban "has significantly reduced American dependence on foreign oil, kept U.S. refining utilisation high, and insulated American consumers from geopolitical shocks," according to the spokesman.
He might have added that the ban has also contributed mightily to the company's profitability and its stellar stock price performance in the last three years (Chart 3).
The high profitability of midcontinent refineries processing crude from the Bakken and other shale formations is one reason to doubt that U.S. motorists derive much benefit from the export ban.
Refineries appear to have successfully captured much of the "rent" created by the export ban. There is no evidence that they pass on discounted crude prices to consumers in the form of cheaper gasoline and diesel.
Although U.S. refiners claim lifting the ban would raise gasoline prices for U.S. motorists, and make them more volatile, the principal impact would be to shrink the refining margins currently earned by refineries in the central United States. Motorists are unlikely to see any increase in the cost of filling up.