A barrel of crude oil has little value on its own. It must be refined into specific petroleum products that have a market demand and corresponding economic value. In Europe, however, demand dynamics for crude oil products have changed so rapidly and are so out of sync with Europe’s refining capabilities that the refining industry is on the verge of collapse. While Europe often looks to Russia and the Middle East when lamenting about its energy security, the most dire threats it faces are at home.
Europe’s refineries are dying. To start, refineries are constructed in specific (and expensive) ways to produce the right balance of petroleum products from different grades of crude oil. The characteristics of a refinery’s construction are referred to as the refinery configuration, and it dictates the type of petroleum products that an individual refinery can produce and, in turn, sell for profit.
However, Europe’s refineries are configured in ways that are now incompatible with European demand. Product demand has shifted drastically from gasoline to diesel due in large part to Europe’s perhaps overly-aggressive environmental and regulatory policies. This has rendered billions of dollars of capital investment in refineries obsolete, and European refiners are now ill-configured to meet the realities of European demand trends.
Banks in Europe recently cut the financial credit lines to Europe’s largest independent refiner of petroleum products, Petroplus. With five refineries across four European countries and the capacity to produce nearly 600,000 barrels per day of refined petroleum products, the Petroplus failure represents the largest systematic jolt to Europe’s refining industry to date. However, Petroplus’s woes are only the latest in a series of recent refinery closures and “rationalizations” throughout Europe and the Mediterranean region that is leaving refining capacity off-line. The result is that Europe is rendered ever-less capable of supplying itself with the petroleum products that power industry and home. Unfortunately, there is no doubt among energy analysts that European refinery closures will continue throughout the decade, jeopardizing Europe’s medium-term energy security in the process.
To make matters worse, in the current bearish investment climate Europe must make up for shortfalls in products by increasing product imports from abroad. However, the countries making investments in the correct refinery configuration and which have enough spare capacity to export product are not necessarily Western allies. Russia and Venezuela, for example, are increasingly investing in refining so they can export petroleum products to under-supplied European markets. China and India are investing heavily in refining to meet their own demand, and are already undercutting EU refineries in product prices with their exports, further threatening EU refineries. Saudi Arabia and other resource rich Middle East countries are also paying more attention to their refining industries, hoping to make more money by exporting product, not just crude, to Europe and world markets.
Whereas Europe is more likely to resort to protectionist measures to save, not bolster, their refining industry, the emerging energy superpowers of the world are making the right refinery investments – at the right time - to meet future global demand. As slow growth and de-industrialization threaten to plague Europe for years to come, the continent will become increasingly reliant on product imports from abroad. As a result, energy insecurity will only grow, and Europe will become even more at the mercy of its oil rich and refining rich neighbours.
Posted on February 18, 2012
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