The Energy World is Flat: Opportunities from the End of Peak Oil

Chapter EightFlattener #5 – Overcapacity

With my sunglasses on I'm Jack Nicholson; without them, I'm fat and 60.

Jack Nicholson

Crude oil in its raw form, as it appears in nature, is not very useful.

Refineries play a key role and convert useless crude oil into useful refined products such as gasoline, diesel, and jet fuel. Refineries buy crude oil, process it, and sell a basket of refined products to capture the “refinery margin”.

The most complex refineries have the ability and flexibility to optimize the output and today we can generate greater volumes of cleaner products than we did before.

But neither the refiners nor the consumers have benefited in economic terms. Due to the structural overcapacity of the industry, it has been the producers and the governments of the consumer nations who have, for the most part, captured the economic returns.

And the refiners have no one to blame but themselves.

Déjà-Vu

In 1995, the oil company I was working for decided to expand its refining operations. At that time, global overcapacity exceeded 7 million barrels per day,¹ but our senior management had a “long-term view” of the sector. I visited several refineries across Europe looking for suitable assets to buy, and we even considered building a new one in China (until we saw the requirements of the Chinese government, including the minimum number of workers, minimum output, suppliers to be approved, just to name a few). In the end, we didn't buy or build any new refineries, but all ...