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Oil Refineries

Why don't oil refineries operate at full capacity?


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December 16, 2011 7:18PM

In the early 2000's there was almost no excess global refining capacity. The reason for the lack of excess capacity was that the industry had not added any capacity since the 70's. The lack of added capacity was due to the fact that since the 70's a huge amount of excess capacity had existed. It took almost 20 years for demand to catch up with excess capacity and the refining industry suffered low profits from the 1970's until 2002. When the demand caught up new refineries were built and they are beginning to come on line and are the reason for the increase in excess capacity. The capacity of a refinery to produce oil is increased with new innovations in the refining process and the removal of bottle necks within the system. Excess capacity is built into refineries to meet future demand. Assuming that oil refineries don't operate at full capacity to make more money and drive up prices is a false assumption. History shows that the profit margin for a refinery decreases as excess capacity increases. The global oil industry's growing challenges to increase crude production to meet demand and fill excess capacity is a much more likely source of high prices.