Wednesday, June 06, 2007

Why no one's making more gas

CNN Money of all places:

In short, investors, like the oil industry itself, are concerned that refining will one day revert to being a barely profitable business.

"These guys don't want to put money into a business that's historically cyclical," he said.

Over the last 25 years, McKee said the S&P 500 has generated percentage returns somewhere in the low teens, while refining has returned about half that.

"There's a good reason there's been some discipline in the capital markets," he said. "It's been a pretty tough story over a long period of time."


Rusty said...

Another reason why it's difficult to jump on the "let's just make more gas" bandwagon is that it takes time to engineer, purchase equipment for, and build new refineries. Process engineering can sometimes take 6 - 12 months, detail engineering another 12 months, some equipment takes 4 months just to purchase - with another 13 months to fabricate and deliver, then it might take another 4 months to install the equipment and 3 months to finish and turnover the plant.

The petrochemical business is very cyclical, though. I remember way back in the early '80s a job I was on that, due to a drop in prices, ended up getting cut back from 13 sites to just one, and even then, when the one site was completed it still wasn't profitable to run - so they just locked it up and waited...

David M. Smith said...

Hi Rusty,

I’ve known and understood for a long time that gas prices are more a function of refining capacity than the cost of a barrel of oil. I assumed the gas refining companies were benefiting from an over-active government and the regulations required to build new refineries. I was surprised to learn how unprofitable comparatively refining has been in the long run.

Thanks for your comments as well.