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Economic Currents

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Breaking Down The Tesoro Refinery Closure - Part 2

Earlier this month, after a year-long unsuccessful effort to sell the facility, Tesoro announced they were shutting down their refinery while continuing to offer it for sale. The question on everyone’s mind—what does this mean for Hawai‘i?

This 3-part series by UHERO Graduate Assistants Iman Nasseri and Sherilyn Wee attempts to answer those questions.

Part 1: Hawaii’s Oil Market
Part 2: Why did Tesoro close instead of Chevron?
Part 3: How will this affect gasoline and other prices?


Part 2: Why did Tesoro Close Instead of Chevron?

Tesoro Hawaii faces worse conditions than both Chevron Hawaii and Tesoro’s mainland refineries. How? Despite being the larger of the two local refineries, Tesoro’s facility is less sophisticated than Chevron’s. Tesoro’s refining operation yields a larger share of fuel oil (35%) than Chevron (20%). Due to renewable energy developments and energy efficiency enhancements, fuel oil demand is shrinking as the demand for fossil fuel-based power generation declines. To cut it’s fuel output, Tesoro was forced to continuously lower its refinery’s utilization rate. In 2010, Chevron operated at around 85% utilization rate, while Tesoro’s stood at around 75%. 

This is already a very low utilization rate. Forthcoming EPA regulations will make matters even worse. In 2017, EPA requirements will ban utilities from burning anything with ash content. 
While these rules are primarily targeting coal fired power plants, Hawai‘i power plants would also be affected (and will probably be the only non-coal plants in the entire country to be affected). The end result is the destruction of a major portion of fuel oil demand for Hawaii’s refineries and even lower utilization rates. At lower utilization rates, Tesoro would have struggled to earn a profit without major investments to upgrade the facility. 

So the decision was made to convert the facility to an import, storage, and distribution terminal. As we mentioned in part 1, Chevron may eventually find itself in a similar situation and arrive at a similar decision.

But would RTT conversion (Refinery To Terminal—that is to import fuels rather than crude oil) enhance or diminish our economy’s fuel supply risk in terms of exposure to greater price fluctuations or supply disruptions? It depends! 

Under normal conditions, importing fuels from a fairly well supplied market would not lead to any increased price variability when compared to the alternative of importing crude and refining at home. But due to the pricing mechanisms described in part 1, caused by Hawai
i’s specific oil market conditions, some products are currently priced at a higher markup compared to imported fuels, hence there is a good chance that RTT would provide us with cheaper options for some fuels if not all.  

However, during periods of heightened volatility, crude oil and refined products may both be in short supply. It may be more difficult to deliver refined products to Hawai
i than to obtain unrefined crude. But we are talking about a period of global oil crisis, something that has not occurred in more than thirty years. 


Discuss on FacebookRead Part 1Read Part 3


Disclaimer: Blog posts are intended to stimulate discussion and critical comment. The views expressed in this article are those of the author.

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