Refining turned from the neglected stepchild to the beauty queen of the oil industry during the past five years, as growing US and global demand for transportation fuels and ever-tightening quality specifications raced ahead of refinery capacity.
Of course, nothing cures high prices like high prices (as the hackneyed saying goes), and refiners ramped up their expansion plans to take advantage of the strong crack spreads.
The question then -- is the pendulum swinging back the other way, and capacity now outweighing demand growth? Some analysts are speculating that it has. According to a five-year outlook issued this week by energy analysis firm ESAI, "The massive new refining capacity coming on-stream in the next few years should bring refining margins down sharply from their current highs. The market is poised for a major correction in this notoriously cyclical industry."
ESAI hedges itself a bit later in the report, with the caveat "Assuming the new capacity comes on stream as scheduled...". The Barrel thinks that is a large assumption, given the recent tendency for refiners to scale back expansion plans due to the high (and rising) costs of material and skilled labor.
With Chinese economic growth still running hot, it's likely that the market for materials needed for refinery expansions will remain tight, and as the pool of skilled refinery engineers grows older, that labor market should continue to tighten as well.
So -- while the end may be near for really huge refining margins, the dog days of the 1990s are not likely to return any time soon.
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