Hey Buddy – Got A Product Tanker To Spare?

Memorial Day vacations are likely to be stay-cations, the idea that became popular during the 2008 run-up in gas prices. By then, it is expected that the average price of regular gasoline in the United States will be over $4.00/gallon and may well top the record of $4.11/gallon set in 2008. Already, the price of a gallon of gasoline is hitting $5.00 in some parts of the U.S. And it is only February.

Listening to the newscasters today, you might get the idea that the rapid increase in fuel prices is due to tensions with Iran. Without a doubt, Iran refusing to sell crude oil to certain European nations is going to restrict the normal flow into refineries. There is also much talk about the Greek debt package that is expected to be put in place and how that it is affecting oil speculators. There is, however, another factor that no one is talking about and it’s all about refineries.

In Europe, Petroplus, the operator of five refineries, filed for insolvency in January, citing the run-up in Brent crude prices. On the Caribbean island of St. Croix, the Hovensa refinery has ceased operation. Last, but not least, in the Philadelphia, Pennsylvania area, three refineries are closing or have already closed.

The three refineries in question are the ConocoPhillips facility in Trainer and two Sunoco facilities – one in Philadelphia and one in Marcus Hook. Comprising more than 50 percent of the refining capacity in the Northeast – nearly 700,000 barrels per day (bpd) – closing these facilities is likely to impact supplies of petroleum products and to create price volatility. So, if the refined petroleum products such as gasoline, diesel and home heating fuel aren’t coming from these refineries, from where IS it coming? The answer might surprise you.

By the end of 2012, European refineries are expected to be supplying the vast majority of gasoline required, with the sourcing of diesel and heating oil a little sketchier. Diesel is a hot commodity in Europe, so we may have to look as far afield as India to source some of these products. The U.S. Gulf Coast, with their larger and more efficient refineries stand to ship up to 50,000 bpd of refined product into the Philadelphia area – a small fraction of the production lost, to be sure.

That small fraction, however, may be enough of a problem in that the U.S. flag product tankers required may not be available. Product carriers in general will be in much greater demand with this new supply system into the United States. Whether the capacity is there in the international fleet for such imports is unknown. What IS certain is that this will be an experiment in supply and demand whose cost will be borne solely by the American consumer.

On January 24, 2012, President Obama stated in the State of the Union address to Congress, “This country needs an all-out, all-of-the-above strategy that develops every available source of American energy a strategy that’s cleaner, cheaper, and full of new jobs.”

Less than 3 weeks after the State of the Union address, U.S. Senator Bob Casey of Pennsylvania called for a Senate hearing to look at the impact closing the three Philadelphia, Pennsylvania area refineries will have on local workers and the prices of gasoline and diesel in the Northeast. While refinery capacity worldwide is expected to be adequate to supply the East Coast, of the 110 refineries in Europe, up to 25% will require modification to comply with new standards. So….in the short term, more product tankers – both domestic and international – will be required. In the long term, who knows from where our refined products will be coming. Might be something for Washington to consider.

Author’s Note
: Much information supplied by Mike Corkhill on the Baltic and International Maritime Council (BIMCO) website, “Atlantic Basin Refinery Closures Impact Tanker Shipping.”


Very interesting indeed…maybe that decision by Aker in Philadelphia to build those two Jones Act product tankers on spec with help from the city will not prove to be a bad one afterall. There certainly is something afoot in the energy world with unpteen billions being invested in spectulative projects such as drillships and I have been predicting here for sometime now that the energy majors know something we don’t. I see a huge price spike in oil looming with both Israel’s anticipated attack on Iran, the increasing demand from both the continued tremendous growth in emerging markets plus the ending of the recession. Of course, too big of a spike will have the result of causing demand to drop rapidly as people cancel taking their energy intensive summer recreation and the other shockwaves that will go thru the world economies. The endless rollercoaster just keeps going and going forever.

I just hope when Israel does attach Iran, they do it right the first time, with overwhelming force and don’t miss. A short and successful war will actually help energy markets in the long run when the world’s anxiety level is rapidly reduced.