EIA: Refinery outages do not have ‘significant’ price impact

The interplay between supply and demand has a greater impact on oil and gasoline prices than decreased production caused by refinery outages, according to a report by the Energy Information Administration.

The report, titled, “Refinery Outages: Description and Potential Impact on Petroleum Product Prices,” was released in March. It was requested in July 2006 by Sen. Jeff Bingaman (D-N.M.), chairman of the Senate’s Energy and Natural Resources Committee.

“How have outages affected prices?” is the key question the report addresses.

The EIA’s answer, based on statistical analysis of monthly and weekly data, is that outages generally do not have a significant price impact. “Prices are affected not by production changes alone, but mainly by the balance in supply and demand, as represented by inventory levels,” according to the report, prepared by the EIA’s Office of Oil and Gas.

Following are excerpts from the report:

“If supplies are abundant relative to demand (e.g., high inventories and off peak time of year), a refinery outage, even an unplanned outage, is likely to have little impact. The lack of a statistical relationship between outages and gasoline crack spread may be surprising to some analysts. Keep in mind, the statistical analyses used are designed to capture normal market variations and responses, and while they indicate that most of the time, outages have little impact on prices on a monthly average basis, they do not imply outages never affect prices.

“There are times when the marginal supply of barrels lost due to outages have added to price pressure, such as when a tight market balance already exists and alternative supply sources are not readily available. Clearly the outages that occurred during hurricanes Rita and Katrina were large enough to impact price. Another case was highlighted in an earlier report on California gasoline where several large unexpected outages in conjunction with tight gasoline market conditions seemed to drive up prices. However, outages with measurable impacts on monthly prices are relatively rare.”

The report also offered a historical context:

“...Up until the mid 1990s, the U.S. had excess refinery capacity. Refinery utilization in 1985 averaged 78 percent, and refinery outages seemed to have little if any impact on product prices, since a substantial amount of extra capacity existed to compensate for outages. Between 1985 and 1995, demand grew, while refinery capacity remained relatively flat, resulting in utilization increasing to 92 percent by 1995. Since then, U.S. refineries have been running near capacity during the peak-demand summer months. With little spare refinery capacity available during peak demand times, unexpected refinery outages can result in local supply disruptions that result in temporary price surges. Still, refinery outages do not always result in price pressure. Other factors can influence the impact that outages have, such as the time of year relative to seasonal demand peaks, availability of imports, availability of inventories, and even what has transpired in the market place in the prior weeks...”

The complete 53-page page report can be viewed at
http://www.eia.doe.gov/oiaf/servicerpt/refinery_outages/SROOG200701.pdf.