For the first time for many years the world is facing a shortage of refining capacity. This summer margins in all three main refining centres have been at their highest since 1996. Despite soaring crude prices, first gasoline and then middle distillate prices have reached record highs this summer, a clear sign that refinery production is falling short of demand. If global demand starts to hit against refining constraints this winter, demand could be squeezed as product prices rise even further.
With global consumption expected to grow by well over 2 mbpd this year and a further 1.5 mbpd in 2005, refineries could struggle just to match this huge surge in the volume of products required by the market. Utilisation is already high in the main consuming areas and throughputs may have to rise significantly in other regions in order to supply products for export. Global product stocks are still at historically low levels and will not be able to provide an alternative source of supply during times of peak demand.
Other problems arise, too, when refineries are operating close to capacity. Imbalances spring up between the relative proportion of products that are produced and the shape of the demand barrel — in particular, fuel oil output tends to outstrip the market’s ability to consume it. Difficulties arising from variations in regional quality specifications also become more acute at high rates of utilisation since there is less flexibility to vary cut points and blendstocks. Inter-regional trade may also be affected if exporting refineries are unable to meet new, stricter specifications. Widening differentials between light and heavy products and changing arbitrage opportunities are all symptoms of a refining system that is under strain.
Global data for the refining industry do not at first glance support the view that capacity is in short supply. Figures from the BP Statistical Review for 2003 give capacity utilisation outside the FSU as 87%, scarcely changed from the last two years and lower than it was in the second half of the 1990s. This year, this figure is likely to be nearer 89%, assuming that the level of crude runs reached in the first half of the year is sustained into the second half. However, this still does not indicate an approaching capacity crisis.
A true measure of refinery utilisation, however, must take into account the large number of old, small, unsophisticated and inefficient refineries that are included in global capacity figures. Many of these are in Africa, Latin America and the former Eastern Europe, and most operate at very low rates, pulling down the average rate of utilisation. Last year the refining systems in North America and the EU averaged over 90% utilisation, while those in Asia-Pacific and the Middle East ran at between 85% and 90%. In the remaining regions,which account for a quarter of global capacity, utilisation was less than 75%.