Valero Energy Corporation is a Fortune 500 company based in San Antonio with approximately 20,000 employees and annual revenues of $55 billion. One of the top U.S. refining companies, Valero has an extensive refining system with a throughput capacity of approximately 2.5 million barrels per day. The company's geographically diverse refining network stretches from Canada to the U.S. Gulf Coast and West Coast to the Caribbean.

There hasn't been a new oil refinery built in America since 1976 and with existing plants working close to capacity, even a minor outage in a plant can impact the price of oil.

A combination of tight environmental restrictions, not-in-my-back-yard community opposition, and the high cost of new construction has been an impediment to additional capacity.

A new refinery would cost about $3 billion and refining margins have traditionally been much tighter than on the crude production side.

The recently passed Energy Bill omits limited liability protection for MTBE, a petrol additive that pollutes groundwater. Valero, the largest American oil refining group, has announced that it plans to stop producing the additive in 2006 when the new law goes into effect. The loss of 60,000 barrels of petrol per day, will be coumpounded, if other refiners follow suit.

The combination of limited spare crude production capacity and oil refining capacity will continue to bolster prices.

US Energy Information Administration  detail on Oil Refining:

U.S. refining capacity, as measured by daily processing capacity of crude oil distillation units alone, has appeared relatively stable in recent years, at about 16 million barrels per day of operable capacity (graph).  While the level is a reduction from the capacity of twenty years ago, the first refineries that were shut down as demand fell in the early 1980's were those that had little downstream processing capability.  Limited to simple distillation, these small facilities were only economically viable while receiving subsidies under the Federal price control system that ended in 1981.  Some additional refineries were shut down in the late 1980's and during the 1990's, always, of course, those at the least profitable end of a company's asset portfolio.  At the same time, refiners improved the efficiency of the crude oil distillation units that remained in service by "debottlenecking" to improve the flow and to match capacity among different units and by turning more and more to computer control of the processing. 

Furthermore, following government mandates for environmentally more benign products as well as commercial economics, refiners enhanced their upgrading (downstream processing) capacity.  As a result, the capacity of the downstream units ceased to be the constraining factor on the amount of crude oil processed (or "run") through the crude oil distillation system.  Thus crude oil inputs to refineries ("runs") have continued to rise, and along with them -- given the stability of crude oil distillation capacity -- capacity "utilization" rose throughout much of the 1990's (again, see graph).  Utilization -- the share of capacity filled with crude oil -- reached truly record levels in the last half of the decade, nominally exceeding 100 percent for brief periods.  

Top World Oil Consumers, 2004*
	Country	Total Oil Consumption (million barrels per day)
1)	United States	20.7
2)	China	6.5
3)	Japan	5.4
4)	Germany	2.6
5)	Russia	2.6
6)	India	2.3
7)	Canada	2.3
8)	Brazil	2.2
9)	South Korea	2.1
10)	France	2.0
11)	Mexico	2.0
*Table includes all countries that consumed more  than 2 million bbl/d in 2004.

As with most aspects of the U.S. oil industry, the Gulf Coast is by far the leader in refinery capacity, with more than twice the  crude oil distillation capacity as any other United States region.   (The difference is even greater for downstream processing capacity, because the Gulf Coast has the highest concentration of sophisticated facilities in the world.)   As discussed in the section on Trade, the Gulf Coast is the nation's leading supplier in refined products as in crude oil.  It ships refined product to both the East Coast (supplying more than half of that region's needs for light products like gasoline, heating oil, diesel, and jet fuel) and to the Midwest (supplying more than 20 percent of the region's light product consumption.) 

There are seasonal patterns in refinery input.  In the United States, refinery runs mirror the overall demand for products -- lower in the colder months and higher in the warmer months.  In addition, as they move out of the gasoline season in the early autumn and then as they move into the next gasoline season in the late winter, refiners routinely perform maintenance.  The duration and depth of the cutback in refining activity during each maintenance season is affected by a variety of factors, including the relative strength of the market for refined products.   Therefore, when stocks are high and demand slack, the refinery maintenance season is likely to be longer and deeper.  Refinery activity will also respond to the market's need (and hence relative prices) for product, with changes in the level of crude oil throughput as well as emphasis on one product over another. 

World Refining Capacity

Broadly speaking, refining developed in consuming areas, because it was cheaper to move crude oil than to move product.  Furthermore, the proximity to consuming markets made it easier to respond to weather-induced spikes in demand or to gauge seasonal shifts.  Thus, while the Mideast is the largest producing region, the bulk of refining takes place in the United States, Europe or Asia. 

There have historically been a few exceptions, concentrations of refining capacity that were not proximate to consuming markets.  A refining center in the Caribbean, for instance, supplied heavy fuel oil to the U.S. East Coast where it was used for power, heat, and electric generation.  As the demand for this heavy fuel oil, or residual fuel oil, waned, so did those dedicated refineries.  While the Caribbean refineries, as well as refineries in the Middle East and in Singapore, were built for product export, they are the exception.  As such, most refineries meet their "local" demand first, with exports providing a temporary flow for balancing supply and demand.  (See the section on Trade.)  

The largest concentration of refining capacity is in North America (in fact, the United States), accounting for about one-quarter of the crude oil distillation capacity worldwide, as shown in the graph, and as discussed more fully below.  Asia and Europe follow as refining centers.  As also shown in the graph, North America (again, the United States) has by far the largest concentration of downstream capacity -- the processing units necessary to maximize output of gasoline.  The gasoline emphasis of course mirrors the demand barrel and hence refinery output in the different regions, since no other global region uses as much of its oil in the form of gasoline as North America does.

Refinery Profitability and Industry Structure

In general, refining has been significantly less profitable than other industry segments during the 1990's, as shown in the accompanying graph.  Gross refinery margins -- the difference between the cost of the input and the price of the output -- have been squeezed at the same time that operating costs and the need for additional investment to meet environmental mandates has grown, thus reducing the net margin even further.  In addition, much of the investment made during the 1980's was designed to take advantage of the differential between the dwindling supply of higher quality crude oils and the growing supply of heavier and higher sulfur crudes.  When that differential narrowed, however, the financial return on those investments declined.  Refining margins peaked in the late 1980's. 

During the 1990's the role of independent refiners (those without significant production) has grown substantially, largely as the result of refinery purchases from integrated companies (the "majors") seeking to streamline and realign their positions.  Furthermore, the independent refiners, like the majors, are in a period of consolidation; the mergers and acquisitions are having a significant impact on refinery ownership (although not overall refined product supply).