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benefiting handsomely from locational advantages and outdated
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
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
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
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