OIL

Refinery 'mismatch' seen as culpable for Midwest gasoline price spike

NEW YORK -- High gasoline prices in the Midwest are attributable to refinery outages and transportation challenges as energy industries scramble to adapt to a new glut of oil on the market, but they are likely a maintenance blip and not evidence of a long-term capacity shortage, analysts said.

The cost of gas in nine Midwestern states, from Ohio in the east to South Dakota and Nebraska in the west, has spiked over the last few weeks. In Minnesota alone, the pump price rose to an all-time high of $4.28 a gallon Monday, leaving it well above the national average and vying with Hawaii and California for the most expensive U.S. petroleum.

The spike has even affected oil-rich North Dakota as refinery outages, maintenance and turnover to process different kinds of crude have conspired to hit the region at the outset of the summer driving season.

The high costs prompted Sen. Al Franken (D-Minn.), chairman of the Energy and Natural Resources Subcommittee on Energy, to urge the Energy Information Administration this week to resume studying and reporting on planned refinery outages as a way to address the problem.

Franken sent a letter to EIA and the Energy Department with Energy and Natural Resources Chairman Ron Wyden (D-Ore.) demanding the departments collect information from refineries, a practice stopped in 2011, "to take action to remedy this situation by restoring EIA's program to track planned refinery outages."

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Given all the talk of U.S. energy independence and oil exports in the near future, the spike appears to have caught many motorists and lawmakers off-guard. But analysts pointed out that even if the United States is pumping more crude than it has in decades, it will take awhile yet for infrastructure to catch up.

Denton Cinquegrana, executive editor of U.S. refined products at the Oil Price Information Service, acknowledged that the Midwest "is a hotbed right now," but he expects the spike to be short-lived and gas to return to more usual regional levels by Father's Day in mid-June.

Cinquegrana said he anticipated "a tough mid-late spring" because refineries like the BP PLC plant in Whiting, Ind., are going through reconfigurations so they can refine cheap western Canadian crude oil that wasn't necessarily on the drawing board a few years ago.

Add to that a planned Exxon Mobil Corp. turnaround at its Joliet, Ill., refinery, and you can see why the Chicago region has entered "a very delicately balanced supply/demand picture," he said.

Booming value

The same cascading puzzle has rippled through places like Oklahoma, Kansas and Minnesota due to refinery breakdowns and the recent recovery of a plant in St. Paul, Minn. Cinquegrana said these turnarounds to process different kinds of crude may be more deliberate than anticipated because such assets have recently become more valuable after a long financial winter for the domestic U.S. refining sector.

"You could have bought a relatively small Midwestern refinery for a couple hundred million dollars a few years ago, [but] that same refinery is probably worth about a billion now," he said.

Patrick DeHaan, a senior petroleum analyst at GasBuddy.com, noted that refining capacity has increased in recent decades while the number of refineries has actually dropped. That means bigger plants, so when one of them goes down, "it has more of an effect," he said.

"It would help having more refinery diversity, but that's not something one has control over," DeHaan said. "I've long advocated for refinery oversight, but no one seems interested."

Michael Levi, an energy expert at the Council on Foreign Relations, concurred that it's not about a capacity shortage so much as "a mismatch" between U.S. production and the type of refineries available. More broadly, he said, the explanation for the prices is fairly simple: It's a series of outages at just the wrong time.

"For outages to have no impact, we'd need to see enough refineries built so that in times where there were no outages, many of them would go unused or make little to no money," he said. "I don't see how that would come about."

Transportation squeeze

Transportation is also an issue. Brian Youngberg, energy analyst at Edward Jones, said production has outpaced the U.S. capacity to move product. Pipelines take a long time to build and face push-back along the lines of the Keystone XL debate, so the Midwest has in part experienced a transportation squeeze.

This is why rail has suddenly become more of an option even though it's much more expensive than product traveling by pipe. Youngberg finds it interesting that both producers and refiners are acquiring rail cars and said this demonstrates the need to "improve transportation quickly."

"We have plenty of refining capacity, just not near where production is growing," he said. "Thus all parties are scrambling to get it to market ASAP to improve prices for producers that are still below what refiners view as alternative sources."

A.T. Kearney partner Herve Wilczynski agreed that the key issue demonstrated by the Midwest price spike is "misalignment" of U.S. pipelines and a lack of availability of the right kind of refinery on relatively short notice.

"The issue is that the nature of the refining capacity has evolved to be more in line with what the industry thought would be a world dominated by heavy crude and that the pipeline infrastructure has not anticipated the rapid development of light tight oil (shale oil) from U.S. onshore," he wrote in an email.

Wilczynski added that the ramp-up of shale oil has mostly taken players by surprise with formations such as the Bakken in North Dakota producing a lighter oil, which is why it's selling at a discount.

To actually get to U.S. energy independence, he cautioned, the transportation/refining nexus will be key.

"The reality has to deal with infrastructure issues where crude does not flow efficiently to the right refining centers with the optimum configuration," Wilczynski said.

'More frequent local' price swings on the horizon

Another partner at A.T. Kearney, Neal Walters, added that shuttered refineries often schedule outages years in advance, but when unplanned events occur -- such as Superstorm Sandy last year -- "there is less slack for capacity available for shorter-term, emergency supply coverage."

So, to Walters, the bottom line is the United States does not need more refining, but motorists should brace for price escalation now and then as part of market fluctuations.

"Consumers can expect more frequent local, isolated price swings than has historically been the case, particularly when unplanned production outages occur in the refining sector," he said.

Cinquegrana agreed and is betting that the situation will be short-lived.

"Our inventory pool ... is very shallow, so it drains quickly," Cinquegrana said. "But a shallow pool also fills up quickly as well; that is the main reason why I believe this is going to be an episode versus a miniseries in the Midwest."

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