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A Glut of Refineries Is the Oil Industry’s Next Problem

A Glut of Refineries Is the Oil Industry’s Next Problem

New capacity in the developing world is making European plants that turn oil into gasoline and other products obsolete

By Rochelle Toplensky: Sept. 3, 2020 5:03 am ET

This year’s oil glut is already receding. It is a shame that can’t be said of the global glut of oil refineries, which is only getting worse.

Europe in particular has long had too many oil refineries, but the pandemic-induced fall in energy demand has ramped up pressure to resolve the problem. For the region’s big oil producers—already reeling after a flood of excess oil pushed some prices below zero in April—a few aging assets are likely in line for a makeover. Others could be destined for the scrap heap.

Refineries buy oil to process into gasoline, diesel, jet fuel and other products. Most output is easily shipped, so competition is global as well as regional. Historically, developed-market refiners supplied developing nations, but recently the latter have built their own facilities, creating excess capacity.

Europe’s fleet is owned by everyone from the major oil companies to local companies. The region’s youngest refinery was built 45 years ago, and while many have been upgraded, new designs are cheaper and more efficient. European refineries are already running at their minimum capacity, says Raul Alcamo of consulting firm Energy Aspects. He estimates that the world needs a 10% capacity cut, yet more new refineries are in the works, primarily in China and the Middle East. The pressure to shutter developed-world capacity will only grow.

This year’s plummeting energy market exacerbated the pain. Utilization hit a record low of 67% in May, pushing margins down to $1.75 a barrel, well below the long term averages of 84% utilization and $7.50 a barrel, according to Bernstein Research. While demand in developed markets is now recovering, it is expected to decline long-term with tightening emissions requirements, increasing fuel-efficiency standards and the rollout of electric vehicles. Growth will primarily come from the developing world, near rivals’ facilities.

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