Petroleum Refining

SIC 2911

NAICS 324110

Petroleum refiners transform crude oil into such fuels as gasoline, kerosene, distillate fuel oils, and residual fuel oils. Refined petroleum products are also used in lubricants and a wide number of chemical applications. See also Petroleum and Natural Gas, Crude.

INDUSTRY SNAPSHOT

After nearly a century of extraordinary growth, the world petroleum refining industry struggled to adapt to the harsher climate of the 1990s. Global production of refined petroleum products leveled off at about 65 million barrels per day (b/d) in the early 1990s. Growth accelerated again in the mid-1990s to more than 70 million b/d, thanks largely to rapid growth in emerging markets, particularly those of East Asia. The Asian financial crisis that began in late 1997, however, along with the beginning of a recession in Japan around that same time, once again dampened demand for refined products such as gasoline. Global production hovered in the 75 billion b/d range in both 1998 and 1999. Production levels surged again in 2000 due to a stronger economy in Asia, as well as economic prosperity in both North America and Europe. However, worldwide recessionary economic conditions began to once again undercut demand at the start of the twenty-first century. In 2003, worldwide consumption hit 78.1 million b/d, with Asia and the Pacific Rim accounting for the highest growth percentages. In addition, 2003 marked the highest prices since the early 1980s.

Furthermore, 2003 brought slight changes to the industry, with little more than a one percent change up or down in North America and Europe, according to Euromonitor. The market in Germany, for instance, declined 1.0 percent to 122.4 mt from 2002 and was expected to decline another 8.0 percent into 2008. The petroleum market in France fell 1.5 percent to 92.8 mt. Transportation was the main consumer of petroleum products, and diesel was the largest market sector, with 41.9 mt. The market was expected to reach 100.0 mt by 2008. In the United Kingdom, the total market had fallen half a percent to 79.1 mt, with diesel dominating at 25.2 mt. Declines were expected into 2008, to a total volume of 74.4 mt. In contrast to the European countries, the U.S. market increased in 2003, but only by 1.4 percent to about 7.05 billion barrels. It was expected to grow slightly the following year, with motor gasoline remaining the biggest market sector. By 2008, the sector was projected to command more than 43.0 percent of the refined petroleum market, for a total value of US$3.4 billion.

By the mid-2000s, industry trends were for further consolidation among companies and higher profits for the biggest companies. In addition, because a major industry hurdle was in overcoming its image as one of the most worst environmental destroyers, the so-called "green" innovations in industry research and offerings were expected to have a major impact on the petroleum industry in the coming years. Industry leader BP, for example, was running its "Beyond Petroleum" campaign, having garnered more than 18 percent of the solar power market share in 2003, among other green research investments. By 2004 and early 2005, global demand greatly outpaced supply, which raised prices to record levels. Unusually, however, record high oil prices did not, in turn, cause the normal decrease in demand. This was mostly due to a spike in economic activity worldwide, especially China, and low interest rates. World oil production grew 3.4 percent in 2004 to 71.7 million barrels per day (b/d).

ORGANIZATION AND STRUCTURE

No industry has better epitomized the term "monopoly capitalism" than the oil industry. For example, the U.S. 1890 Sherman Antitrust Act was in large part inspired by the overwhelming monopolistic power of John D. Rockefeller's Standard Oil trust. Even in the 2000s, roughly a century after the breakup of Standard Oil, the offspring of that early conglomerate—Exxon Mobil and ChevronTexaco—remained among the largest corporations in the world, dominating all aspects of the oil industry. With their massive integrated supply, production, and distribution systems, leading oil companies were involved in a myriad of industry activities, including resource extraction, manufacturing, and distribution.

Petroleum refining itself was considered part of the "downstream" side of the oil business. In addition to refining, downstream operations included transportation (mostly via pipelines) of crude oil to refineries and refined oil products to wholesalers, distributors, and retailers. The "upstream" side of the business involved all aspects of finding and recovering crude oil, including exploration, geological studies, testing, drilling, and extraction. Integrated companies—the so-called "majors" such as Exxon Mobil, Royal Dutch/Shell, BP, and ChevronTexaco—carried out both upstream and downstream operations. Raw materials obtained by the upstream arm of the corporation were transferred to the refiner, which in turn supplied the finished products to company-owned wholesalers and retailers.

Competing with the major companies in the late 1990s were numerous, smaller integrated and nonintegrated companies, or "independents." Some of these independents, such as Atlantic Richfield and Phillips Petroleum, were integrated international corporations in their own right, although their numbers dwindled in the early 2000s due to industry consolidation. For example, BP Amoco, which subsequently shortened its name to BP, acquired Atlantic Richfield in 2000. In addition, a merger of Phillips Petroleum and Conoco was scheduled for 2002. Most of the remaining independents were regional companies specializing in refining. Although prominent independents such as Ashland Oil and Valero Energy Corp. played an important role in the refining industry, none of them was on the same level as the majors.

Petroleum refineries converted crude oil into a variety of products. Most of these products, such as fuel, were distributed in the form in which they were to be used, although some products were used in the manufacture of other products such as plastics. The most common refining technique was distillation (also known as fractionating). Heated crude oil was pumped into the bottom of a distillation tower where the lighter oil portions, or fractions, vaporized. The fractions cooled as they rose and condensed into liquids that flowed downward again and were re-vaporized. This process was repeated until the desired degree of purity was achieved. Heavier fractions, such as fuel and diesel oils, condensed at higher temperatures and were tapped off from the lower part of the tower, while lighter, value-added products such as kerosene, gasoline, and butane condensed at lower temperatures and were taken from the top.

More sophisticated refineries conducted additional processing of distilled products, applying various combinations of pressure, heat, or chemical catalysts to break down heavier molecules into lighter ones. These various processes, termed "cracking," were used to create cleaner, more efficient fuels and oils such as high-octane gasoline and lubricants. Catalytic cracking, for instance, used a powdered chemical catalyst to increase the gasoline yield by converting heavy fractions to lighter ones, while hydrocracking added hydrogen to produce products with lower carbon to hydrogen ratios. Other processes included thermal cracking, hydrofining, reforming, and alkalization.

The chief products emerging from these processes included the so-called "light products," the lightest fractions, such as liquefied petroleum gas (LPG), gasoline, aviation fuel, and petroleum solvents; the middle distillates, including kerosene, heating oil, waxes, and diesel fuel; and the heaviest fractions such as asphalts (bitumens) and residual fuel oil, used in industry and power generation. The type of products a given refinery produced depended more on geographical location, customer demand, and seasonal needs than technical capability.

In addition to fuels and oils, refineries produced "intermediate" products such as ethanol, styrene, ethyl chloride, butadiene, and methanol. These intermediates were mostly used in the manufacture of plastics, but they were also needed for antifreeze, synthetic fibers and rubbers, and detergents.

BACKGROUND AND DEVELOPMENT

Petroleum was, quite literally, the fuel that drove modern industrial society, supplying nearly half of the world's total supply of energy. Automobiles, tractors, trucks, aircraft, and ships were powered by petroleum derivatives such as gasoline, kerosene, and diesel oil. Homes and offices were heated by fuel oil and natural gas or by petroleum-generated electricity. Plastics, paints, fertilizers, insecticides, soaps, and synthetic rubber all used petroleum as a raw material. Even synthetic fibers in clothing were derived from petroleum products.

Petroleum was used since ancient times to waterproof boats and repair roads. It also served as a medicine, an ointment, an incendiary, and an illuminant. Serious exploitation of petroleum did not begin until the 1850s, however, when the rising price of lamp oil (derived from whale blubber) prompted a search for a cheap and convenient substitute.

In 1854, a young New York lawyer named George Bissell and some partners formed the world's first petroleum company—the Pennsylvania Rock Oil Company—and began exploiting oil seeps (underground deposits of oil and gas that escape to the surface) around Titusville, Pennsylvania. In 1859 the Pennsylvania Rock Oil Company drilled the world's first well in Titusville, Pennsylvania. Soon...

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