CHAPTER III, THE CRUCIAL FACTORS: REFINERY OUTPUT AND CRUDE OIL SUPPLY

The operations of U.S. refineries are analyzed in Section I of this chapter. The adequacy of crude oil supplies is discussed in Section II.

SECTION I. REFINERY OPERATIONS

REFINERY CAPACITY LEVEL

The government, oil industry, and individual companies consider a 92% refinery capacity utilization level based on crude oil runs to stills to be reasonable, obtainable and sustainable for the industry. This level includes allowances for normal maintenance downtime, but does not consider shutdowns resulting from extraordinary events. The validity of this 92% is shown by the following:

1. Refineries are able to operate at over 100% capacity for considerable periods of time by foregoing short run maintenance. 2. The industry operated at an average utilization of 95% during the June-August 1973 period (monthly levels of 94.9%, 94.4% and 95.6%, respectively).

3. American Petroleum Institute (API) recently stated that "under the old definitions the maximum sustainable level of refinery operations is in the range of 94-96 percent of total operable capacity . . . over long periods of time." "

ANALYSIS OF INDUSTRY REFINERY OPERATIONS

Refineries located east of the Rocky Mountains (PAD Districts I-IV) 10 operated at 87.5% of capacity during 1972 (see Table 1), in comparison to the maximum sustainable rate of 92%.

For the first four months of 1972, refinery capacity utilization was lower than for any comparable month of 1970, 1971 and 1973 (see

The staff of the Office of Oil and Gas (the statistical forecasting section of the Department of the Interior) and the Bureau of Mines.

5 The American Petroleum Institute.

For example, see "Shell Oil No. 2 Fuel Oil Position-Attachment I," received by the Office of Emergency Preparedness, February 1, 1973.

This 92% level pertains to crude oil runs to stills. Crude oil runs to stills is the total amount of crude oil processed through refinery distillation units and crude oil charged to other processing units. It does not include other inputs into crude oil distillation units, such as lease condensate, natural gas plant liquids, unfinished oils, and other liquid hydrocarbons (shale oil, tar sands oils, gilsonite, etc.).

It should also be noted that API recently (July 1973) changed its definition of capacity to total inputs to stills. All references in this report to API capacity utilization data are on the basis of crude oil runs to stills.

Questions And Policy Issues Hearings On Refinery Capacity, Senate Committee on Interior and Insular Affairs, Question 2, pp. 2-3.

10 A detailed analysis of refinery utilization and production will not be made for PAD District V (west of the Rocky Mountains) since capacity utilization and relative levels of production for this part of the country were even lower than throughout the remainder of the United States. What was generally indicated about refinery operations east of the Rocky Mountains would be even more pronounced in the Far West where excess refinery capacity was even more readily available.

Figure 1 and Table 1). During this period, refineries operated at only 84.2% of capacity in comparision to 90.7% in 1970, 87.2% in 1971 and 90.7% in 1973. Thus, refinery capacity utilization during the first four months of 1972 was 6.5 percentage points less than 1970, 3.0 percentage points less than 1971, and 6.5 percentage points less than 1973. Similarly, for the first half of 1972, refineries operated at only 85.3% of capacity in comparison to 89.7% during 1970, 86.6% during 1971 and 91.2% during 1973. For the six-month period of 1972, refineries operated at 4.4 percentage points less than 1970, 1.3 percentage points less than 1971, and 5.9 percentage points less than 1973.

From the relatively low level of refinery runs for the first four to six months of 1972, refinery runs increased to 90.3% during the third quarter, up almost five percentage points from the first half (see Figure 2). This was the highest level of capacity utilization for the year. During the final quarter of 1972, refinery capacity utilization dropped 1.6 percentage points to 88.7%.

TABLE 1.-REFINERY CAPACITY UTILIZATION EAST OF THE ROCKY MOUNTAINS-CRUDE OIL RUNS TO STILLS

The actual production of refineries in barrels of refined products per day is shown in the top portion of Figure 2. During the first four months of 1972, production of refined products averaged approximately 9.4 million barrels per day. From this low level, refinery runs increased in May and June, building to a quarterly high (third quarter) for the year of approximately 10.1 million barrels per day. During the final quarter the actual production fell to approximately 9.8 million barrels per day.

EFFECTS OF REDUCED REFINING CAPACITY UTILIZATION DURING 1972

One of the consequences of the relatively low refinery runs during the first four to six months of 1972, and the drop in refinery runs from the third quarter to the fourth quarter was a decrease in inventory levels in comparison to demand during 1972.

The days supply of inventory of home heating oil and gasoline is presented in Figures 3 and 4 and Table 2. This industry statistic was computed by dividing the average daily demand into the beginning of the month inventory. From Figure 3, it can be observed that the days supply of home heating oil for 1970 and 1971 closely track one another, except for the first four months of the year, which reflect the severity of the 1970 winter. But the 1970 days supply was quickly replenished in early spring. Consequently, the industry began 1972 with more days supply than in either 1970 or 1971, but by March, the 1972 position had deteriorated to below the low 1970 (severe winter) level. The distillate "shortage gap" continued to increase, falling 28 days behind 1970-1971 levels by October, the beginning of the peak heating season (see the crosshatched area, Figure 3). Unlike 1971, inventories were not replenished in 1972 prior to the heating oil season. The relatively low utilization rates of refineries for the first four to six months did not allow heating oil inventories to build as they had in the previous year.

Similarly, the 1970 and 1971 days supply of gasoline inventories (see Figure 4) closely track one another. However, as refinery runs were reduced in early 1972, the days supply of gasoline stocks fell below the prior two years. The shortage gap of gasoline inventories began in February 1972, as did the distillate shortage gap.