Jan 302012
 January 30, 2012  Posted by at 3:21 pm Energy

Energy08The Automatic Earth has repeatedly stressed the intersection between our global financial system and our energy systems, which is typically something that is either unnoticed or misinterpreted by those focusing on just one or the other.

While many peak oil advocates tend to describe economic/financial crises as a function of scarce energy, TAE has argued that financial booms and busts can occur independently of energy issues.

Nicole Foss, in the TAE Primer article Oil, Credit and the Velocity of Money Revisited, makes the distinction clear:

“By the time we have oil shortages, we won’t have any credit-fueled demand because there will be no credit. First we lose the credit, which cripples purchasing power, then we lose demand (where demand is not “what you want”, but “what you can pay for”). We’ll have a temporary glut of oil, which will kill investment.

The lack of investment in new production, and lack of money for maintenance of existing equipment, and potential sabotage of existing equipment by those with nothing left to lose, set up a supply crunch. By that point very few have any purchasing power at all, and none of it credit-based, but governments and their militaries will be chasing down whatever is available for their own use (and hoarding where possible.

People have managed to leverage the darnedest things in human history. I’m not suggesting they do it in the absence of energy, but as I said before, the creation of virtual wealth through leverage takes much less energy than the creation of something real. Energy is required to fuel the necessary socioeconomic complexity of course, and it can be energy in many forms – food surpluses, wood or cheap/slave labour from colonies for instance.

Fossil fuels have enabled the largest increase in socioeconomic complexity in history, and financial innovation is part of that. But finance is not purely a passive consequence. It is a key driver in its own right, especially during contractionary times, or maybe we should say: THE key driver both during Ponzi growth times and Ponzi contraction (collapse) times.”

The growing financial strains in the oil refinery industry are a very good example of this distinction. Petroplus, the largest independent refiner in Europe, was first cut off from a revolving credit facility of $1.75bn with its banks and then was forced to file for bankruptcy. Emma Rowley and Garry White for The Telegraph reports on how this was not simply a one-off failure, but an increasingly large threat for many refineries.

The Petroplus failure is just the tip of the iceberg in the oil sector

“The end of last year saw the announcement that three on the US East Coast were to close. Prior to its collapse, Petroplus had shut three of its European refineries and halved output from its UK and German plants. As recently as Wednesday, Hovensa said it would mothball its giant St Croix refinery in the Virgin Islands and use it for storage.

That took the total closure count in refinery capacity to 1.5m barrels per day (b/d) for the year so far, Deutsche Bank analysts calculate. Over 2009 to 2014, they think nearly 5m b/d of refinery capacity will be permanently “idled”, a total amounting to 6pc of global capacity.

Yes, Petroplus was laden with high debt as a result of its private equity-backed business model, and some of its plants were in fact profitable. But it was also a victim of the slender margins faced across the industry.

The profits refiners enjoy by “cracking” crude oil into petrol and other products have suffered as operating expenses and the cost of Brent-linked crude oil have risen. Then you can add overcapacity into the mix, as global economic problems weigh on demand.”

Here we have a classic situation of over-leverage, over-capacity and plummeting demand for oil-based products combining to take a vital component of energy processing out of the picture over upcoming years. Demand levels will vary significantly across refineries depending on which specific products they produce, but the ongoing deterioration in global credit markets and the real economy are certainly key drivers of decreasing margins.

Much of the pain for the industry seems to be concentrated in OECD nations, as explained in a 2011 report by the International Energy Agency on the world’s oil and gas markets.

Medium-Term Oil & Gas Markets 2011 Overview


“With early 2011 refining margins mired below the heady levels seen at the middle of the last decade, we see a structural overhang in refining capacity persisting through the medium term. Globally, crude distillation capacity increases by 9.6 mb/d during 20102016 (95% of this in the nonOECD), with further additions in upgrading (6.9 mb/d) and desulphurisation (7.3 mb/d).


While capacity rationalisation amounting to around 1.8 mb/d has been identified within the OECD, it is offset by debottlenecking at other units and is insufficient to prevent utilisation rates there falling further, to around 75% by middecade.


OECD Europe has also seen opportunistic purchasing of distressed refining assets by producers keen to get an operational toe-hold in a maturing, but nonetheless strategically placed, swing refining hub. Restoring global utilisation rates to the levels enjoyed in the last five years would require over 4 mb/d of capacity closures or project deferrals by 2016.”




As is the case with most analyses by official institutions such as the IEA, we can safely assume that the effects of credit contraction on refinery utilization are being under-estimated. Refineries forced to scale back or go off-line in the short to medium-term will negatively impact crude oil demand, and we should see this add to the pressure currently weighing on crude oil prices. Lower prices will then feed back into the marginal financial pressures facing the oil industry.

These forces of debt deflation will make it much more difficult for producers, refiners, distributors and retailers of oil and oil-based products to maintain the levels of production, infrastructure, equipment and outlets needed to provide an adequate supply to meet demand down the line, once contraction of credit has largely ran its course. As TAE has consistently made clear, a sharp demand collapse now = an even sharper supply collapse later.


Home Forums Petroplus – The Tip of an Iceberg

Viewing 1 post (of 1 total)
  • Author
  • #8647

    The Automatic Earth has repeatedly stressed the intersection between our global financial system and our energy systems, which is typically something
    [See the full post at: Petroplus – The Tip of an Iceberg]

Viewing 1 post (of 1 total)
  • You must be logged in to reply to this topic.