Tuesday, June 12, 2007

A Predictable Bottleneck

Two weeks ago I looked (5/25/07) at the risk that higher biofuels mandates would deter the expansion of US refineries. Today's Wall Street Journal examines another constraint on those expansions: an industry-wide shortage of experienced personnel, along with higher construction costs. This problem is another consequence of the extended "wilderness years" from which the sector has only recently emerged. Two decades of low margins and large investments to comply with expanding environmental regulations imposed cost pressures that forced refineries to run as leanly as possible. In the meantime, an entire generation found employment in other, flashier industries. Unfortunately for consumers, the bill is coming due now.

The refining business changed in many ways after I started work at Texaco's Los Angeles Plant in 1979, right out of engineering school. Most of the large, sophisticated refineries were then owned by major oil companies, while the independents typically had smaller, simpler facilities that operated more opportunistically. But the increases in oil prices and energy costs in the late 1970s, along with the subsequent requirements to remove lead from gasoline and most of the sulfur from all petroleum products, weighed heavily on refinery economics, in a period in which capacity exceeded demand. Small, marginal refineries shut down, while larger but still unprofitable refineries were sold by the majors to the remaining independent refiners. The industry endured several such cycles, and in each one experienced workers were offered early retirement or simply made redundant.

There's no question that refinery modernization and automation reduced the minimum manpower requirements of these facilities. But in a period when refinery managers had little discretion in their investment budgets and couldn't control their fuel and feedstock costs, clever human resource strategies offered one of the few levers for "making your own margin," a mantra I recall from the late 1980s and early 1990s. Staff was reduced below the levels necessary to handle major annual maintenance, with much of this work outsourced to contractors. Some facilities went further, outsourcing even routine maintenance. That made sense, because a smaller number of shared workers could service the entire industry's needs, as long as work was scheduled carefully.

Events outside the industry undermined this strategy in ways that didn't really become apparent until the aftermath of the hurricanes of 2005, when a number of refineries needed major repairs, competing with the normal maintenance cycles. Had the US economy resembled that of the 1980s, refineries and their contracting companies would have simply staffed up again, and this aspect of those events would have been a blip on the charts. Instead, the transformation of the country during the 1990s created essentially a full-employment economy, and most of the workers with previous refining experience had found good jobs elsewhere, ones that didn't involve such loud, noisy, smelly and potentially hazardous facilities. At the same time, the whole refining sector is facing the same demographic challenge as other mature industries, with many of its most experienced workers approaching retirement age within the next five years. It is no longer hypocritical to say that people are these companies' most important assets.

Throw in all the other shifts that we see, and you have a scenario in which the prospect of ever expanding US refineries by enough to cover all of domestic demand looks not only unlikely, but perhaps even unattainable at any reasonable cost. Some level of expansion--or even a brand new refinery or two--looks desirable, because it would make us less vulnerable to events in other markets. However, our present reliance on gasoline imports creates an opportunity to expand biofuel production and introduce large numbers of diesel automobiles without causing further dislocations within the existing domestic refining industry.

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