Refinery Profitability and Industry Structure

In general, refining has been significantly less profitable than other industry segments.  Gross refinery margins -- the difference between the cost of the input and the price of the output -- have been squeezed at the same time that operating costs and the need for additional investment to meet environmental mandates has grown, thus reducing the net margin even further.  In addition, much of the investment made during the 1980's was designed to take advantage of the differential between the dwindling supply of higher quality crude oils and the growing supply of heavier and higher sulfur crudes.  When that differential narrowed, however, the financial return on those investments declined.  Refining margins peaked in the late 1980's. 

During the 1990's the role of independent refiners (those without significant production) has grown substantially, largely as the result of refinery purchases from integrated companies (the "majors") seeking to streamline and realign their positions.  Furthermore, the independent refiners, like the majors, are in a period of consolidation; the mergers and acquisitions are having a significant impact on refinery ownership although not overall refined product supply.

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