The U.S. Refining Industry – Striving to Maintain Global Leadership

Dean Foreman
Posted October 2, 2019

When it comes to motor fuels, the prices we pay at the pump historically reflect crude oil prices – the No. 1 input cost according to the U.S. Energy Information Administration (EIA) – as well as the relative prices of other products, which collectively motivate refiners to manufacture different fuels. 

We’ve seen through the energy revolution – and especially since 2015 – how lower prices for crude oil and natural gas (a key processing fuel and operating expense for refiners) have advantaged the U.S. petroleum refining industry – and ultimately led to lower fuel prices for consumers at home and abroad.   

The progress that the U.S. refining industry has made since 2010 in terms of increased investment, capacity, throughput, and lower imports and higher exports of petroleum have been nothing short of stunning, as we have highlighted in API’s Monthly Statistical Report. And these investments should well position the U.S. refining industry to lead as global market competition continues to increase. For example, U.S. refineries have made significant investments in recent years to enable them to play a significant role as the world transitions to low-sulfur marine fuels in January 2020, as we discussed here.   

When we take stock of this progress and the high degree of difficulty involved for the U.S. refining industry to plan its operations so smartly, we see a strong industry that has been resurgent through the energy revolution and is striving to maintain its global leadership. Let’s take a closer look at some factors fueling these trends.

U.S. refineries have continually adapted to increase their scale and reduce costs while maintaining strong operational integrity.

New investments at existing sites – both to improve scale economies and to achieve synergies with integrated refining and petrochemical facilities – have resulted in total U.S. refinery capacity expansion by 6.8% over the same period, to 18.8 million barrels per day (mb/d) this year from 17.6 mb/d in 2010. Meanwhile, the capacity utilization rate of U.S. refineries has exceeded 90% for five consecutive years by API estimates, a rate that is No. 1 in the world.

As we discussed in this post, explaining why the U.S. must import and export oil, the quality of crude oil – the viscosity of oil (measured by its API gravity) being light or heavy as well as its sulfur content being low (sweet) or high (sour) – largely determines the processes needed to refine it into fuel and other products. In general, refineries match their processing capabilities with types of crude oils from around the world that enable them to:

• Make the most high-value motor fuels and other petroleum products in a cost-effective manner
• Serve niche product markets for chemicals, petrochemical feedstocks, lubricants, waxes and materials for roads and roofs

While the transportation sector runs primarily on motor fuels, our society also depends on thousands of products that begin as crude oil. And historically, the U.S. has needed to import crude oil in whatever types were readily available and cost-effective to fully serve domestic needs. Responding to market conditions has required the U.S. refiners to have flexibility, so they have  invested in our relatively complex refineries that have a variety of processing facilities – crackers and cokers – which are able to break down molecules from the heaviest crude oils, including upgrading “bottom of the barrel” processing capacity – typically from Canada and Venezuela.    

However, the U.S. energy revolution has been a step-change forward in producing high-quality and economically advantaged crude oil – light, sweet, abundant and increasingly available on-demand via a highly interconnected pipeline, storage and processing infrastructure system that has improved the timeliness and reliability of domestic crude supplies coming to market.

With these advantages, U.S. refiners have invested, adding hundreds of new processing units, evolving the variety of U.S. refining processes and associated products they can produce as well as the variety of things that subsequently can be made from those products.  

Refiners also are increasingly looking to “molecule management” and optimization techniques to meet changing demand patterns. For example, the recent focus on “crude to chemicals” shows how refiners look to future petrochemical feedstock demand rather than traditional petroleum product demand and are investing more in new capabilities.

In plain English, this means the U.S. now has unprecedented flexibility to adapt to changes in quality of crude oil, and this capability likely will continue. The Oil & Gas Journal reported as of May that 23 expansion projects and unit additions will add nearly 0.7 mb/d of U.S. refining capacity by 2022. These are strategic investments that, with a strong engineering, procurement and construction sector, should add capacity that capitalizes on the most productive workforce in the world. This new world order in refining is laying the groundwork now for American refining capabilities of tomorrow.

Zooming out to the macro trends from sector-specific developments, the shift in international trade dynamics is another key to the industry’s progress. Notably, as U.S. has sustained world-leading crude oil production at a record pace of 12.3 (mb/d) in August 2019, U.S. crude oil imports have fallen by more than 2.5 mb/d since 2010 at the same time as U.S. petroleum exports grew by nearly 6 mb/d.  More than half of this growth in U.S. petroleum exports was refined products. 

From a macroeconomic perspective, the refining and petrochemical industries are high so-called “multiplier industries” in that they offer strong follow-on economic activities in manufacturing, transport, trade and market development.  Of course, other nations know this as well and also are adding refining capacity, especially in Asia Pacific and the Middle East. These trends could reinforce U.S. crude oil production and exports but also continue to increase competition among global refiners. Consequently, the U.S. cannot rest on its laurels.  

One thing is clear, however: U.S. refineries’ efficiency and ability to recognize, respond to and serve global markets has been a strong combination so far that has rewarded disciplined and deliberate infrastructure investments, integration and strong refinery throughput and capacity utilization rates. 

This is a home-grown and relatively unheralded success story that is helping grow our economy and global energy leadership, and its continuation is a key to sustaining the U.S. energy revolution through incremental growth, infrastructure and trusted international trade relations.