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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. 


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

Breaking Down The Tesoro Refinery Closure - Part 1

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 1: Hawai'i's Oil Market: A tale of two refineries
Hawaii is an extremely small part of global oil markets (almost 90 million barrels per day). Hawaii consumes 100-145 thousand barrels per day (kb/d) of petroleum products with fluctuations since the early 1980s. Currently the state has two small refineries: Chevron and Tesoro. Chevron’s Hawai‘i refinery was built in 1962 to supply the growing fuel market in Hawai‘i. Its crude distillation capacity was initially 33 kb/d, but has since been expanded to 54 kb/d. The Tesoro refinery was built as a 30 kb/d facility in 1970 by a company called Pacific Resources International (PRI). That facility changed hands twice—in 1989 to BHP, an Australian mining and oil company, and again in 1998 to Tesoro. After being upgraded and expanded several times, the refinery’s capacity is now nearly 94 kb/d, 75% larger than the Chevron facility.

The total refining capacity of both facilities, nearly 150 kb/d, has exceeded Hawaii’s demand for refined products for quite some time, and Hawaii’s demand for oil is actually expected to shrink further due to a variety of factors. One factor affecting the prospects for Hawaii’s petroleum market is the Hawai‘i Clean Energy Initiative (HCEI), whose express purpose is to gradually wean Hawai‘i’s economy off oil. Other factors include, but are not limited to, the possible introduction of Liquefied Natural Gas (LNG) into Hawai‘i’s energy mix, existing and future environmental regulations that may limit the use of petroleum products (such as burning fuel oil to produce electricity and/or marine transportation), increased EV penetration and improved fuel economy in the ground transportation sector, and flat to moderate economic and population growths in short- to medium-term future.

In addition, in today’s worldwide refining industry, the most profitable facilities have the following characteristics:
- large[1]  enough to achieve economies of scale
- small enough relative to the local market to sell all of its production in the local market regardless of its operating strategy
- in a market where imports of all products are required (to have a natural price floor through import-parity pricing). 


Hawai‘i’s refineries do not enjoy any of these conditions!

Taken as a whole, it is clear that the closure of at least one of Hawaii’s refineries was expected, and baring some significant improvement in the local refining industry, Chevron may very well follow Tesoro’s conversion to an import facility.

[1] Current average-sized refinery worldwide is about 400 kb/d


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

Hawaii's Proposed 400MW Wind Energy Project Explained

How will the proposed 400 MW Wind Energy Project contribute to the State’s Renewable Energy goals?

Hawaii has one of the most stringent Renewable Portfolio Standard (RPS)* policies in the country as well as the highest electricity rates due to dependence on oil for electricity generation (Coffman et al., 2012). As such, renewable energy technologies like wind tend to be more cost-effective in Hawaii than elsewhere in the U.S.

After the signing of the Memorandum of Understanding between the State of Hawaii and the U.S. Department of Energy, the Hawaii Clean Energy Initiative, Hawaii increased its’ RPS law to achieve 40% of electricity sales based on renewable energy sources by the year 2030. It specifies that:

  1.      1) 10% of net electricity sales be based on renewable energy sources by the end of 2010,
  2.      2) 15% by 2015,
  3.      3) 25% percent by 2020, and
  4.      4) 40% by 2030.

Renewable fuel/energy types include solar, wind, ocean, geothermal, biomass-based, landfill gas, hydroelectric, CHP/cogeneration, hydrogen, anaerobic digestion, and waste. In the year 2015, energy efficiency ceases to count as a “renewable” energy type and will instead be governed by an Energy Efficiency Portfolio Standard (EEPS).

Using a model of Hawaii’s electric sector, we find that the proposed 400MW wind project will meet about 10% of the State’s energy needs in the year 2030. Figure 1 shows Hawaii’s possible energy mix from 2010 to 2030. The figure represents a scenario where:

  1.      1) the least-cost mix of electricity generation is selected assuming that the 400MW
  2.           wind project is built in the year 2020,
  3.      2) fuel prices (oil, coal and bio-oil) follow the Energy Information Administration’s (EIA)           reference trend, and
  4.      3) the RPS law is met.


It is important to note that the RPS does not govern the use of the other 60% of fossil fuels (which remains oil-dominated)** nor does it distinguish between types of renewable energy (see Coffman, Griffin and Bernstein, 2012). For example, biofuels are counted similarly to solar photovoltaic or wind energy, even though their net energy content and greenhouse gas emissions impacts are quite different. The proposed wind project largely serves to limit the amount of imported biofuel used to meet the RPS.***


Does the proposed 400 MW Wind Energy Project make economic sense?

Using both the model of Hawaii’s electric sector and one of Hawaii’s overall economy, we find that moving forward with the proposed 400 MW wind project has net benefits to Hawaii’s economy because of a positive terms of trade effect. Fundamentally, wind energy serves as a “hedge” against potentially rising and volatile fuel prices, including biofuel prices. Biofuel prices are highly linked to oil due to their high level of substitutability. Even when fossil fuel and biofuel prices are expected to be low (according to the EIA’s Annual Energy Outlook 2012), the proposed wind project retains its net macroeconomic benefits, albeit quite small. We find that the project has a net positive impact of $589 million (in $2007 Gross State Product) over the 20-year model time horizon, translating to an impact of $2.80 per year to households.

Although the economic impacts are relatively small (never over half a percent increase in Gross State Product on an annual basis) they are clearly positive through the model time horizon.


Will the proposed 400 MW Wind Energy Project reduce Hawaii’s GHG emissions?

The proposed project serves to reduce Hawaii’s net GHG emissions by about 10 million metric tons of CO2 over a 20-year time horizon. This is a roughly 4% reduction in electric-sector emissions.


-- Makena Coffman



Coffman, M. and Bernstein, P. (2012). “An Integrated Top-Down and Bottom-Up Analysis of Wind Energy.” Prepared for AUBER 2012, Honolulu, HI.

Coffman, M., Griffin, J., and Bernstein, P. (2012). “An Assessment of Greenhouse Gas Emissions-Weighted Clean Energy Standards,” Energy Policy, 45: 122-132.


* Renewable Portfolio Standards are a mandate placed on electric utilities that require a specified percentage of electricity sales be met through renewable sources of electricity by a certain year.

**The model represents all current laws and financial incentives for commercially available technologies. For example, the solar photovoltaic federal and state tax credits are accounted for to the extent that they are currently written into law. The exception, however, is coal. Although there is no law explicitly prohibiting the growth of coal use in Hawaii, we exclude more coal in this scenario because the Hawaiian Electric Company has publicly stated its commitment to limiting future use of coal. The full paper shows a wider array of scenarios.

***We assume that biofuels are imported because of the least-cost framework. It is certainly possible that locally produced biofuels are used to meet the RPS, but at a price premium.

Financing Watershed Conservation

In November 2011, Governor Abercrombie and State officials launched a watershed protection plan entitled, “The Rain Follows the Forest”. The initiative’s goal is to double the current level of watershed protection – approximately 10% of priority watershed areas throughout Hawai‘i are currently protected – over the next ten years at an estimated cost of $11 million per year. Restoration actions would include construction and maintenance of fencing, feral ungulate removal, invasive plant control, and reforestation of native species.

The projected annual cost of $11 million is a large step up from the $1.25 million that was allocated to the 11 watershed partnerships across the State in 2011. However, a study commissioned by the State Department of Land and Natural Resources (DLNR) and undertaken by OmniTrak Group, Inc. in October 2011 found that 78% of survey respondents from a sample of Hawai‘i residents were supportive of such an increase. The result seems to suggest that the public recognizes the need to protect the source of our freshwater and the benefits such actions would provide.

UHERO research was prominently featured in DLNR’s legistative initiative. The DLNR Fact Sheet  notes that one of the most measurable benefits of watershed protection is enhanced groundwater recharge, citing a 2004 UHERO study (Pitafi and Roumasset) showing that a mere 1% loss in recharge in the Ko‘olau Mountains could cost O‘ahu $42 million in present value. The report also cited another UHERO study (Roumasset et al.) that estimated that the total net present value of ecosystem services provided by the Ko‘olau forests is between $7.4 and $14 billion. When considering the fact that forests are also important for water quality, climate control, biodiversity, and cultural, aesthetic, recreational, and commercial values; the benefit-cost ratio of watershed conservation investment is extremely high -- especially compared to physical infrastructure projects being pursued by the State and local governments.

As of May 2012, the State Legislature has partially funded the watershed protection initiative with $2.5 million in Capital Improvement Projects (CIP) funds and $2.5 million in special funds. Governor Abercrombie’s office again acknowledged UHERO’s research in the announcement of the State watershed action plan, which calls for increased funding in future years. Bond financing watershed conservation through the CIP program is an important precedent. Like building roads and schools for the future, investing in natural capital such as our watersheds increases net present value by ensuring that valuable ecosystem services are sustained in the long run.

In the future, DLNR will be seeking to put the initiative on more sustainable financial footing and plans to work with UHERO on examining alternative methods of finance. One possible item for future consideration is the extent to which watershed investment should be paid for by direct beneficiaries of the additional captured recharge. Much of the benefits generated would accrue to future water users, who will face higher water prices due to rising costs and increased water scarcity. A recent UHERO study (Roumasset and Wada) outlined a method for determining the benefits of watershed conservation by year and constructing a tax structure to pay off the requisite bond, based on the proportion of benefits received by each generation. One way to implement the tax is an appropriate adjustment of the rate schedule for water use.

--James Roumasset and Christopher Wada

Pitafi, B., J. Roumasset. 2004. Watershed Conservation and Efficient Groundwater Pricing. Prepared for the Agricultural and Applied Economics Association Annual meeting, Denver, CO, 2004. University of Hawai`i at Mānoa.

Roumasset, J., J.B. Kaiser, N. Krause, D. Mecham and J. Wooley. 1998. Environmental Valuation and the Hawaiian Economy. University of Hawai‘i Economic Research Organization.

Roumasset, J., C. Wada. 2010. A dynamic approach to the pricing and finance of interlinked ecosystem services: Watershed conservation and groundwater management. UHERO Working Paper Series #2010-12.


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Going green: Green jobs in Hawaii

According to a March 22, 2012 press release from the Bureau of Labor Statistics (BLS), in 2010 there were 3.1 million “green” jobs in the United States of which 15,583 were located in Hawaii. The number at first might seem to be low compared to other states. However, percentage wise the number of people employed in “green” jobs accounted for 2.7% of overall employment level, which is higher than the corresponding national level (2.4%).

Before describing how these jobs distribute across Hawai'i industry sectors it is important to note that the BLS has split their green job definition into two components/approaches: 1) an output-based approach (jobs associated with producing goods or providing services that benefit the environment or conserve natural resources), and 2) a process-based approach (jobs in which workers' duties involve making their establishment's production processes more environmentally friendly or use fewer natural resources). This release only includes the output-based approach, meaning that jobs which focus on education and training are not included, and the BLS expects to release the process-based jobs later this year.

Not surprisingly, the majority of green jobs, both nationwide and in Hawaii, are in the private sector. The highest number of private green jobs in Hawaii is reported to be in the transportation and warehousing industry: 3,932 jobs or 17% of total employment in that industry. Also a relatively high concentration of green jobs is observed among professional, scientific, and technical services (11.3%), natural resources and mining (5.1%), and construction (4.5%). Based on the ratio of green jobs to total jobs, the least green sectors are leisure and hospitality (0.2%) and trade (1.0%). Data for manufacturing, financial activities, and education/health services were not reported as it did not meet BLS disclosure standards.

One could expect an increase in jobs in the coming years associated with the Hawai'i Clean Energy Initiative, a statewide goal to achieve a 70% reduction in fossil fuel use by the year 2030. The initiative is driving policy development and funding towards renewable energy and energy efficiency. The State recently expanded its Renewable Portfolio Standard law (HRS § 269-91 et seq.) and passed an Energy Efficiency Portfolio Standard (HRS § 269-96 et seq.), requiring 40% of electricity generation to come from renewables and a 4,300 gigawatt hour reduction in electricity use by 2030, respectively. As the state ramps up to meet these obligations, presumably green job growth will occur.

In the past, there have been some challenges with quantifying the concept of green jobs since there was no clear consensus regarding what constitutes a green job. As defined by the BLS, green jobs are found in businesses that produce goods and provide services that benefit the environment or conserve natural resources. The Bureau lists five groups that green jobs fall into: (1) production of energy from renewable sources; (2) energy efficiency; (3) pollution reduction and removal, greenhouse gas reduction, and recycling and reuse; (4) natural resources conservation; and (5) environmental compliance, education and training, and public awareness. The data compiled by the BLS are collected through the Green Goods and Services survey which is based on approximately 120,000 establishments within 333 industries that are identified as potentially producing green goods or providing green services. It is important to recognize that not all jobs within these 333 industries are green: some of the industries may produce a mix of green and non-green goods or no green goods at all!

Hawaii's Department of Labor and Industrial Relations (DLIR) launched its own “Hawaii Green Job Survey” that targeted more than 9,000 businesses statewide. The survey builds on the Hawaii Green Workforce Report. The DLIR's definitions of “green” jobs, core green areas, and the total number of green jobs are somewhat similar to the BLS's definitions. However, despite the similarities, the number of green jobs by industry reported in “2010 Hawaii's Green Workforce: A Baseline Assessment” vary greatly. For example, the top three industries for green jobs are construction (the ratio of green jobs to total jobs equals 11%), administrative/support/waste management and remediation services (7%), and professional, scientific, and technical services (4%). Transportation and warehousing sector, on the other hand, had only 175 jobs compared to 3,932 jobs reported by the BLS. The discrepancies might be due to differences in the methodology; the DLIR did not separate their study into an output-based approach and a process-based approach. There will be an opportunity to better understand the discrepancies when the BLS releases the process-based numbers later this year.

-- Inna Cintina



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