Unrefined

If and when the average person thinks about peak oil, their attention and concern are focused on the gasoline and diesel fuels that run the family car, the heating oil that warms the family home, and the jet fuel that runs the plane that takes the family on vacation. And that is reasonable. By far the biggest single use of crude oil is for the production of those various fuels. Our society literally runs on oil. But remember that there are over 300,000 other products, other than those fuels, in every day use around the world that are derived from oil.

The road between the undiscovered crude oil in the ground and the gasoline in your car's fuel tank - or any other usage - is a very long and expensive one. It must be discovered, analysed, wells drilled and extracted. From there it has to be gotten to a refinery for processing to produce gasoline, diesel, heating oil, jet fuel, lubricating oil and other lubricants. That resulting gasoline has to be distributed to a service station near you so you can drive your car in and fill up your tank.

In case you hadn't noticed, there is a shortage of oil refining capacity in the United States. From 324 oil refineries in operation in 1980-81 (when the U.S. was still a major exporter of refined products) closures over the past thirty years have reduced that number to less than 140.[13] In that same thirty years no new oil refineries have been built in the United States [16], and more refineries close each year. And increasingly tough and demanding environmental legislation, coupled with a general, overall reduction in the quality of available crude oil that is more difficult, expensive, and polluting to refine, lessens the probability that any will be constructed in the foreseeable future.

Despite the fact that more than 20 million barrels of oil are consumed in America every day, the total remaining refining capacity in the country is down to 17,734,900. And 1.6 million barrels or more of refined product are still exported to other countries every day, up 33% since 2007[15]. That is 9% of a total refinery output that is already insufficient to meet demand. This means that the capacity for refined product for American consumption of more than 20 million barrels a day is 16.225 million barrels a day, and dropping.

There is no spare capacity in the system, no refining buffer. Any refinery closure, whether temporary due to storms, strikes or other problems, or whether permanent, the shortfall cannot be made up from spare capacity. The favorite mantra of economists, of course, is that supply will always rise to meet demand. An average of 2-3 million barrels of refined product is being imported every day, largely from Europe, to make up for the current shortfall. And still there are no new refineries under construction to meet the unfulfilled demand. With an average capacity of 125,000 barrels a day, the equivalent of the output from over 15 unbuilt refineries is being imported every day. That could hardly be interpreted as supply rising to fill demand.

Margins in the refining industry are quite low, with costs continuously rising. In the early days of the oil industry when the majors could sell their oil for 20 times or more what it cost to produce it, the oil companies largely ran their own refineries and were prepared to live with the low margins in the refining end of the business which were more than offset from the huge profits in the oil production end of the business. But independently owned refineries are the order of the day with major after major selling off their refinery operations to independent refiners. And today, rather than new refining capacity coming online to satisfy the increasing demand for finished product as economic theory suggests, the refining industry is, in fact, looking to reduce overall capacity to drive margins up. The question is not whether but where and when capacity will be reduced further. The trend to date is to close capacity in states where state government has an anti-pollution agenda while holding on to capacity in those states that are refinery and oil industry friendly and likely to remain so.

And where refining capacity is being shut down is a recipe for future fuel shortage problems. The two latest refinery shut downs have been in the high population upper east coast market (Valero Energy Corp. shuttered permanently its 182,200 barrel-a-day Delaware City, Delaware, refinery last month because of “very poor economic conditions.” Sunoco Inc. shut indefinitely its 145,000 barrel-a-day Eagle Point plant in New Jersey in November) [8] taking nearly 300,000bpd capacity out of the system in the highest demand market area in the country.

Domestic gasoline supply on the east coast is now served almost exclusively by pipeline. But just like refining capacity, no new pipeline capacity is being built to satisfy increasing pipeline subscription from, for example, the gulf region to the east coast. In fact the primary pipeline serving the east coast has been badly oversubscribed because of these two refinery shutdowns for over six months now, even before the peak demand summer driving season, and supply is being pro-rated[7]. Pro-ration means nobody gets what they need but the pain is distributed equally.

There is not an overall shortage of refinery capacity globally. New refineries continue to be built in, for example, the middle east and Asia and some parts of Europe, in regions with more relaxed environmental standards where development in high profit industries like oil is encouraged. So, at least for now, refining capacity shortages in the United States can be made up from imports of refined product from overseas. [13] Increasing refiners are responding to domestic environmental legislation by shutting down domestic capacity and pushing it offshore. But the more the country builds a reliance on refined imports as well as crude imports the more vulnerable it becomes to shifts in global geopolitics. And the greater the growth of bottlenecks in the supply chain in the United States for refined product.

When peak oil critics and deniers claim that there is plenty of oil, that there is no oil shortage, they are right. What there is is a growing shortage of light sweet crude. There is plenty of tar sands oil, plenty of very high-sulfur heavy crude, plenty of high-sulfur oil sands crude, plenty of oil shale, and plenty of very expensive to extract deep sea oil, most of which is also high in sulfur. But these are almost all much more expensive and much more polluting to refine. The sulfur extracted from the heavy sour crude of a single 100,000 barrel-per-day refinery would be equivalent to 5% of the total national sulfur market and a shift to high-sulfur heavy crudes would totally flood that market.[9] Introduction of ever stricter environmental legislation makes the likelihood of such a shift happening very slight.

So we may or may not yet be at a global peak in crude oil production, depending on how you define it and what type of oil you include in your crude oil definition. Sooner or later, and more likely sooner, we will get there. Regardless the shift in type of oil available for refining means that we have reached a peak - whether temporary or permanent is unclear - in serviceable refinery capacity and refined product distribution systems. In light of this reality peak oil hardly seems to matter anymore.
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Reference Material:
1) What is the chemical composition of gasoline?
2) What is Gasoline?
3) Petroleum
4) European oil refinery closures get serious
5) Recession leads to more refinery closures
6) Refinery closures - how many and how fast?
7) Refinery Closures Push Gasoline Infrastructure To The Breaking Point
8) Refinery Closures Drive Profit Margins Higher: Chart of Day
9) Processing of heavy high-sulfur crude oil
10) Tesoro CEO says expects more refinery closures
11) Some Refineries Likely to Close as Demand Ebbs
12) Report: Cap and Trade Bill Bringing Refinery Closures
13) No political will to keep oil refineries in America
14) SURGE IN US GASOLINE AND DIESEL EXPORTS
15) U.S. gasoline, diesel exports soar
16) US: No New Refineries in 29 Years