Submitted: Wednesday, Jun 04, 2008 at 15:19

One of the biggest, if not the biggest, myths in the fuel debate is that refiners of petroleum products are making a fortune because of the high price of fuel.

The fact is that refining petroleum products is a high volume, low margin and extremely competitive business. One of the reasons is that fuel is a highly commoditised product; you don’t care who makes it, or who sells it, because no-one company has a unique product. Fuel is fuel; consumers just want the cheapest price and are rarely loyal to any one particular brand.

This isn’t to be confused with the money being made out of pumping oil out of the ground; let’s face it the Saudi’s made a small fortune out of selling it to the world at US$20 per barrel, so at US$ 125 it is fair to say they are probably making a lot more. The same can be said for many other countries and companies engaged in this activity.

It is also fair to say that there are some companies that are fully integrated, pumping it out of the ground, and eventually refining it. However, if you look at the recent BP profit numbers you’ll see that globally they made very little from refining oil into petroleum products and in fact had expected to make a loss from this part of the business.

All refineries purchase crude oil at the going market rate for a barrel of oil and whilst there may be times that the margin received for refining into petroleum products is higher than at other times, if you look at it on a long-term basis the margins are nominal and confirm it is indeed a high volume, low margin business.

America, the bastion of global capitalism has not built one new refinery in 30 years. Take a look at the size of the consumer base and the economy of scale in that country and ask the question why this would be the case if there is so much money to be made out of refining oil into petroleum products – the answer is simple; the economics don’t stake up when you look at the capital cost versus the return.

The Port Stanvac refinery in South Australia closed in 2003 because the capital cost that Mobil faced to upgrade to meet new standards in 2006 did not stake up against the returns that could be generated. Whilst considerable upgrades have occurred in recent years to Australian refineries most were built in the 1950/60s; on average over 50 years ago. Again, I pose the question; if there is so much money to be made out of refining oil into petroleum products why we aren’t seeing investment in new refineries?

Most of the new refineries are being built in the high growth areas in Asia and the sub-continent, particularly China and India. These are large by Australian standards and have the efficiency inherent in new facilities and will have high throughput and economy of scale.

I’ve said before that the one of the greatest threats in Australia is not the price of refined petroleum products, but whether the refining companies can make a return sufficient enough to compete with imported products and one that enables on-going commitment to the Australian facilities.

Tags: Fuel, News & Current Affairs
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