Philadelphia refinery will close: Why it matters
No one wants a refinery in their backyard; until one goes down in flames and it causes you to pay more at the pump. The recent run of lower gas prices may be over as a cog in the U.S. refining system is going out of business.
Philadelphia Energy Solutions (PES) is saying it wants to permanently close its oil refinery, one of the oldest and largest refineries on the East Coast, after an explosion and massive fire. The refiner had the capacity to process 335,000 barrels of oil per day or the equivalent of 14 million gallons and is one of the largest suppliers of gasoline on the eastern seaboard. The event caused substantial damage to its building complex and caused the financially struggling refiner to say enough is enough.
This is a situation that has already caused gasoline prices to go up in the Northeast and may cause a domino effect across the nation. As of late June, the national average gas price was down 19 cents year-over-year and expected to drop even lower, according to AAA and averaging around $2.70 per gallon. In Pennsylvania, the average is higher around $2.90.
Strong U.S. demand, along with this explosion, has rapidly changed the dynamic from falling gasoline prices to prices that are soaring. Since the explosion gasoline futures have rocketed, first on the East Coast but now also in other parts of the country, as other refiners look to replace the lost supply from the East Coast. Consumers will be angry because they will view this as an excuse by oil companies to jack up prices, not realizing that these situations do increase costs.
In fact, many people think that owning a refinery is like printing money. If you feel that way, you had better think again. It is a very tough business with periods of high booming profits but at other times very minuscule profits, and even at times having to operate at a loss.
Philadelphia Energy Solutions had just recently emerged from bankruptcy and was trying to make a comeback as sub-par refining margins and stricter environmental regulations that have made it very difficult to make money. In fact, the government had to forgive Philadelphia Energy Solutions some relief on some renewable energy credits they were forced to buy, that the company said helped drive them into bankruptcy in the first place.
Bad regulations on Renewable Fuel Credits caused the firm to lose millions. The government let them off the hook because they feared that if they lost that refinery, it would drive up gas prices and hurt the consumer. Yet now the company wants to walk away because the cost to rebuild the units that were destroyed is simply not worth it.
Yet the company may not have the last say about the refiner’s fate. The United Steel Workers are already complaining about the 1,000 lost jobs and they want the refinery rebuilt. They want to see if there was insurance and instead of the company and investors walking out with the cash, they want to use it to rebuild and keep the jobs there. The Federal Government also has a stake after helping the company out of bankruptcy. They may want to search for a new owner, but after the bad luck the last company had, it might be hard to find a buyer.
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Regardless of how all that plays out, you will still be paying more for gasoline. Prices have already gone up and this could give us a price spike of at least 10 cents per gallon. The timing, of course, could not be worse.
The Fourth of July holiday is right around the corner, and U.S. gasoline demand is already at record highs. Because of this strong demand and other refining issues, supplies are only at average levels. Just when you thought it was safe to go back to the gas pump.
Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn Learn even more on our website at www.pricegroup.com.@pricegroup.com.