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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (41766)	9/17/2005 1:04:51 AM
From: Elroy Jetson	Read Replies (2) \| Respond to of 110194

I don't think you understand the overall picture. The peak was in for "light sweet" crude in 1976. As drilling economics change, new reserves of light sweet crude become available, but they're not as economic as shallow reserves of sour and heavy crudes and the supply is not growing as fast as demand. A few decades ago, the definition for "sweet crude" used to be less than 0.5% sulfur. We ran short of enough of this crude back in the 1976-1982 period - the last oil price run-up. Now the definition for sweet crude in less than 2.5% sulfur. Why? President Carter requested US refiners upgrade to handle a wider range of crude types to alleviate the shortage -- and they responded. Around 1980 most refiners around the world added primary hydrogen sulfide units to handle more sulfur and improved fluidic cracking units to handle heavier crude. Carter was a lot smarter than many people imagine. Spending billions on refinery upgrades, which Carter let them expense, was a sure-fire way to avoid the Excess Oil Profits Tax. Chevron upgraded Pascagoula in 1980 to handle very heavy and very sour crude. They signed long term contracts with Venezuela and Mexico at a substantial price discount for their low quality crude no one else wanted. This justified spending $1.1 billion for the upgrade, which in current dollars is roughly $3.1 billion. Today Bush has some delusional idea that we need new additional refineries. The oil refining industry has responded with the sound of no hands clapping. This is all simple economics. What sort of moron would shell out unnecessary capital investments on deeper wells or more expensive refineries until its absolutely necessary? What sort of cretin volunteers to refine dirty crude at a huge premium in cost, when everyone else is selling inexpensive gasoline made with "light sweet" crude? Today we are, once again, running short of the types of crude oil existing refineries can handle. Running out of oil is a long linear process, not some abrupt cliff. So somebody has to spend the $3 billion per plant cost of upgrading maybe 15 large refineries. So far China has been the designated chump, since all of the light sweet crude is already under contract to someone else. Saudi Arabia, like any good drug dealer, has decided to pay for an upgrade and expansion of their Port Arthur TX refinery they co-own with Shell, under the name of Motiva, in order to be able to sell more of their sour crude. This will all sort out just like it did in 1980, except this time the President of the USA doesn't understand the oil industry as well as Carter did. About that MTBE. Too bad Valero was badly positioned for a change-over from toxic MTBE to Ethanol, for octane enhancement. The reason for this is they bought Exxon's junk bin refineries. There's a reason Exxon sold them to Valero. Exxon pushed in Tetra-ethyl lead over Ethanol in 1924. Message 21707560 In 1974 Exxon pushed MTBE over Ethanol, over vehement objections from Chevron. Chevron pointed out MTBE was an environmental time bomb. A water soluble poison which is not biodegradable. Only Exxon could have dreamt that one up. Exxon's refineries were not designed to handle a switch-over to Ethanol which Chevron knew was inevitable. So Valero loses a lot of light product until they decide to build enough alkylation units like Chevron did 30 years ago. Now Valero is going to have to spend enough money to catch up with Chevron. Wahhh, boo hoo. In spite of Valero's whining, lowered sulfur emissions and the long over due phase out of MTBE do not reduce the supply of refined product. They leave Valero with the wrong refined products, but not less total refined product. That's their own problem to deal with. I'd suggest they raise money from the capital markets now when they can, because when refining margins head south, they have no retail, and exploration & production profits to subsidize their refining losses. .