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US Oil Refiners in Double Bind
While drivers are facing sticker shock at the pump these days, here is a bigger shock: high prices are putting a strain on oil refiners.
After last year’s stellar profits, American refiners are going through a traumatic period. In a time of record gasoline prices, some of them actually lost money in the first quarter, and for virtually all refiners, profits are down sharply, NYtimes reported.
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Oil prices doubled in the past year, while wholesale gasoline prices rose a mere 39 percent.
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Experts say the refiners are caught in a double bind. The price of their raw material, oil, is rising because of strong global demand. At the same time, consumption of gasoline in the United States is falling as a result of slower economic growth and consumer efforts to conserve.
However much the companies would like to raise gasoline prices enough to pass along the full increases in oil, analysts say they have been unable to do it. Oil prices doubled in the past year, while wholesale gasoline prices rose a mere 39 percent.
“Refiners are having a terrible time,“ said Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation.
For decades, global oil prices were tightly coupled to the ups and downs of the American economy. But in recent years, world oil prices have been pulled upward by heavy demand for diesel from developing countries like China. American economic growth weakened in the last few months, but that has mattered little in the upward march of oil prices.
“What we see at the gasoline pump is increasingly driven by what is happening elsewhere in the global economy,“ said Daniel Yergin, the chairman of Cambridge Energy Research Associates, a consulting firm.
Gasoline prices rose on May 13 to a nationwide average of $3.73 a gallon, according to AAA, the automobile club. That is yet another record. Diesel prices also set a record, at $4.39 a gallon. Crude oil futures closed at $125.80 a barrel, up $1.57, or 1.3 percent, on the New York Mercantile Exchange.
In its latest monthly report, the International Energy Agency, an adviser to industrialized countries, reduced its forecast for global oil demand for this year, as consumption drops by a bigger-than-forecast 300,000 barrels a day in the developed world.
But that decline will be more than offset by growth from developing countries. Consequently, global consumption is expected to rise this year by 1 million barrels a day, to 86.8 million barrels a day. Nearly all that growth will come from China, the Middle East and Russia.
In the United States, there is no longer much doubt that consumers are responding to higher fuel costs by driving less. Oil consumption fell by 3.3 percent in March, compared with March of last year.
But even as gasoline demand softens, the price keeps rising, driven by higher oil prices. The cost of oil represents about 75 percent of the price of gasoline at the pump, according to the Energy Department; state and federal taxes account for 12 percent, and refining and distribution make up the rest.
The rising oil prices have led to a sharp drop in refining profit margins, or the difference between the cost of oil and the cost of gasoline. These margins, at $12.45 a barrel on average, are 60 percent below their year-ago level, and in the lower half of their five-year range, according to a report by UBS.
In response to falling gasoline demand and rising costs, refiners have cut their production rates. Refining utilization rates, for example, slumped to a low of 81.4 percent in the second week of April, compared with 90.4 percent at the same time last year. Earlier this month, refineries were running at 85 percent of their capacity.
All this has translated into a tough quarter for some refiners. While large integrated companies, like Exxon Mobil, reported big profits in the first quarter thanks to their oil sales, smaller independent refiners that buy their oil, instead of producing it themselves, have been losing money.
Tesoro, Sunoco, and United Refining all posted losses in the first quarter. The hardest hit have been small refineries that tend to process the most expensive types of crude oil into gasoline. Sunoco, for example, lost $123 million in the first quarter, while Tesoro posted a $82 million loss for that period, in contrast to a profit of $116 million last year.
“We’re just not able to pass along the increased cost of crude oil on the gasoline side,“ said Lynn Westfall, the chief economist at Tesoro.
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Regular Power Supply Tops Nigerian Agenda
One of the most worrisome plagues confronting the nation is unarguably the issue of stable electricity supply. The magnitude of the problem is such that it seems to hold the sole key to Nigeria’s economic leap.
No doubt, several dormant aspects of the nation’s economy seem to be waiting to be activated by a more regular supply of electricity, AllAfrica reported.
It is regrettable that much as the Olusegun Obasanjo administration recognized the import of stable electricity and seemingly focused on it, it all ended in very little improvement in the power supply situation in the country.
The electricity problem, understandably, became one of the inherited liabilities of the present administration, which for one year, has also been fiddling with workable ideas on how best to fix it.
Efforts in the past to bring in private investors into the scheme have recorded little success. Although the National Electricity Regulatory Commission (NERC) has, for instance, registered over 25 private companies to generate, distribute or transmit electricity, nothing has happened, essentially because prospective investors have among other reasons, cited the low electricity tariff, as not encouraging.
The option, they reasoned, was to increase electricity tariff to a level where they can recoup their cost more readily. But how could a responsible government increase electricity tariff in the face of worsening service delivery?
While it could be argued that without increasing the cost of electricity, investors will not be interested in the sector, it would be punitive to raise cost at a time when service delivery is so sloppy. For a long while this has been the dilemma facing this critical sector.
And given the fact that government was determined to get the task of stable electricity into the domain of the private sector, acceding to the demand for higher tariff became imperative, or so it seemed. The NERC has nonetheless introduced the Multi Year Tariff Order (MYTO) aimed at spreading likely increase in tariff over a period of five years in a way that consumers will not experience tariff shock.
The Federal Government, persuaded by the argument of NERC, recently approved an increase in the tariff, essentially as a motivation to prospective investors in the sector. The kernel of the agreement between the Federal Government and the NERC is that government will subsidize the tariff with the sum of N177 billion within a period of three years.
In other words, consumers will continue to pay the current tariff for the next three years, while the government pays the difference of what the tariff increase will represent.
The idea is that with the subsidy paid, enough investors would have been sufficiently motivated to invest massively in the sector in such a way that within the said period, a remarkable improvement in electricity supply would have been recorded. Towards this end, the government plans to subsidize the tariff with the sum of N77 billion in the first year.
The calculation therefore is that with clear evidence of improved services, consumers will be more receptive to the idea of paying a little more for the improved service, and given that the increase will be graduated over a period of five years, the pinch will hardly be felt.
Although we commend, albeit cautiously, the step adopted by the Federal Government to meaningfully achieve result in the perennial electricity crisis, we advise that this subsidy should be saved from the several abuses suffered by subsidies in other sectors like petroleum, agriculture (fertilizer) etc. Calculated steps must be taken to ensure that the subsidized funds are channeled into improved services.
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Supplying Electricity
Turkmenistan, warming up to outside contacts after decades of
self-imposed isolation, will push ahead with ambitions to supply
electricity to as far away as western Europe.
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Looking Toward Green Future
Blustery winds threaten to topple Iain Russell off the dock into the narrow stretch of water connecting the Irish Sea and the Atlantic Ocean.
But those gusts are a key reason why his company, Wave Dragon Ltd., plans to anchor the world’s largest wave energy converter several miles out to sea off this small town on the southwestern Welsh coast, AP wrote.
More than a century after the industrial revolution’s coal mines and steel works turned Wales’ lush green valleys into stark black hills, the strong winds that batter its coastline are playing a major part in the local government’s plan to turn the country green again.
By 2025, Wales wants to generate all its electricity from renewable sources and even become a net exporter of power.
Wales is betting that two huge projects--a $30 billion tidal barrage in the Severn Estuary and the largest biomass plant in the world in Port Talbot--will produce most of the electricity needed to reach its 2025 target.
For the rest, the local government is hoping that its natural winds, streamlined bureaucracy, access to skilled labor, proximity to universities and state funding will prove enticing to companies in both the renewables and clean technology sectors.
Mining Industry
Going green could make or break Wales following the death of the mining industry in the 1980s. While Cardiff has blossomed from a provincial city into a significant capital in recent years under a retail- and services-led boom, rural Wales has limped along on tourism and agriculture.
A parade of companies deciding to make products from cars to cell phone chargers in Wales shows that the strategy is paying off.
Wave Dragon was encouraged to move its headquarters from Denmark to Wales in part by a $10 million grant from the Welsh European Funding Office.
“The funding dried up in Denmark so we started looking elsewhere,“ said Russell. “We also discovered how much more wave energy there is here than in the North Sea.“
The company plans to locate its wave energy converter about 2 miles to 3 miles off the Welsh coast for testing over three to five years. The barge produces electricity directly from the power of the water by first enhancing, then pulling in oncoming waves to turbines in the bottom of the structure.
Russell said that the project could produce enough electricity each year during the testing phase to meet the demands of between 2,500 and 2,000 homes.
The company hopes to eventually sink around 10 of the structures some 10 miles to 12 miles out to sea to form Britain’s first commercial wave energy farm--but the plan is dependent on nearly $71 million of extra funding Wave Dragon is seeking from private sources.
Wales’ government is “very committed to the renewables goal, but we need the cutting-edge technologies that the private sector can offer,“ said David Jones, vice president of International Business Wales, the trade and investment arm of the Welsh Assembly.
Mainstay of Economy
Mining, once a mainstay of the economy, is no longer a major source of revenue or employment in Wales. The economy is now underpinned largely by the services and production industries. Agriculture, forestry and fishing also contribute to a lesser degree.
In 1979, Wales’ gross domestic product was 93 percent of the British average. That has since fallen to just 77 percent. Over the same period, Ireland--the so-called Celtic tiger-- has seen its GDP go from 60 percent of the UK average to 104 percent thanks to low corporate tax, investment in higher education and EU membership.
Wales hopes to emulate that success with its state funding for renewables and clean technology.
On the outskirts of Cardiff, where G24 Innovations makes silicon-free thin film solar cells to charge mobile phones, the company is planning to install a massive wind turbine in its parking lot later this year.
That will enable the factory to run on renewable energy and eventually sell electricity back to the grid--making it one of the first factories in the world to use renewable energy to make a renewable product.
G24 is initially targeting the African and Indian markets, where mobile phone penetration is growing but electricity grids are in short supply. The company already has a contract with Vodacom in Tanzania, Lesotho and Kenya.
When a new production line is ready later this year, G24 plans to raise production to several million units per year. The company, which is seeking around $40 million to $50 million in further funding and eventually hopes to list on a stock exchange, also aims to branch out into backpacks with built-in chargers for both emerging and European markets.
A few miles to the west, Connaught Engineering Ltd. has invested $24 million in a factory to produce a CO2 emissions-cutting engine component that can be retrofitted to commercial vans. The system saves both fuel and an estimated 25 percent of carbon emissions on diesel home delivery vans.
Tesco PLC, Britain’s largest grocery chain, is one of several companies testing the hybrid retrofit system. If successful, Connaught expects orders of around 4,000 units a year.
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