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July 23, 2012


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are they serious? cheap oil in the plains will cause someone to go build a refinery there? i'd love to see them put their own money into such a project.

Not refineries - refining capacity. Nobody's built a refinery in the U.S. in four decades. But billion-dollar investments to expand throughput happen all the time: overall refining capacity has risen at an annual average of around 1.2% (caveat: figure from memory) over those same four decades. That, in fact, is why nobody bothers to build greenfield any more.

In other words, if input prices were guaranteed to stay low in the Midwest for long periods, refining capacity would rise commensurately. But that's not the same thing as building a refinery.

Should I have written more clearly in the post? Apologies for the confusion.

Nah, I would have been equally snarky either way. I challenge your "all the time" -- I just don't see much new investment coming in US refining, other than environmental compliance upgrades. Here's the Economist on the same issue: http://www.economist.com/node/21559374?fsrc=scn/tw/te/mt/stormypetrol

Or right from the horse's mouth: http://www.valero.com/InvestorRelations/FinancialReports_Filings_Statements/Documents/VEC_1Q12_10Q.pdf

You shouldn't be snarky here. Let's summarize the arguments, based on the article and report you cited.

Noel: If refining margins rise, then investment will follow.

Steven: No, investment won't rise.

Noel: Why not?

Steven: Because investment is not rising right now, when margins are low.

Noel: What??

I hope you'll forgive me for referring you to page 40 of Valero's financials. If all their operations looked like the mid-continent refineries, they would be investing like gangbusters.

Of course, on page 37 they say /exactly what I said above/: they do not expect the differential between WTI and Brent to last, because they expect pipeline projects to come on-line in the next two years.

The implication, of course, is that if those pipelines were not going to come on line, then Valero would be investing. Valero (like me) believes that they will, and therefore is not going to 30-year investments based on a temporary phenomenon.

Admittedly, the post above is a bit punchier. But I think it's worth saying that the Valero financials back my argument in both the numbers and the words.

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