The Complexity of Oil Refineries

The black as tar substance that is extracted from the ground known as crude oil needs to be refined before it is delivered to the end consumer. Meeting the consumer demand is complicated. Refining a barrel of crude oil involves a series of complex processes. In order to produce the gasoline or any of the many other different products demanded by consumers, the crude oil has to go to the designated refineries.

Once the barrels of oil are at the refinery, the first step is the distillation where the oil is heated and then broken down according to different boiling points. When the vapor turns into liquid form, it is separated into its varied component parts. Subsequent processes, often referred to as conversion, focus on transforming lower-valued products into higher-valued products. One example of conversion is removing impurities, such as sulfur, to make higher quality diesel fuel. Another example of transforming a lower-valued product into a higher-valued product is changing bunker fuel suited for ships into different grades of gasoline used in automobiles. It is the size and scope of these various conversion processes that distinguish the differences in refineries.

The United States refining capacity stands at approximately 17 million barrels produced per day. Different refineries will prefer different types of crude oil. At the beginning of 2005, this capacity was spread across 55 refinery companies operating 144 refineries. Vertically integrated operations involving the production of crude oil and independent refiners with little or no crude oil production involved are among the 55 companies. Operations, both large and small, range in scale from millions of barrels produced per day down to thousands of barrels per day. No one refinery can own more than 13 percent of the total U.S. refining capacity.

The refinery segment of the oil industry has been on the decline due to the negative economic returns. The trend in profitability has, until the past few years, been consistently moving downward. As a consequence, the market has seen a decline in the ownership of refining capacity on the part of major oil companies in the United States. During the 1990s, the major U.S. oil companies reduced their ownership of refinery capacity from 72 percent to 60 percent of total U.S. capacity. The fast-growing independent refiners increased their refinery capacity from 8 percent to 23 percent of the total U.S. capacity. The largest independent refiners are now in competition with the major oil companies in their capabilities to meet the nation’s growing concerns and demands for cleaner transportation diesel fuels. Competition from imports is also increasing, as more than 10 percent of the daily U.S. petroleum products consumption now comes from outside the United States. In their efforts to meet the increasing demands for petroleum products, oil companies like Triple Diamond Energy Corporation face these changes and purchase or lease the necessary amount of refineries.