The refinery sweepstakes begin
As we have previously noted, oil refineries, paper mills and office buildings share some common investment characteristics. They are big boom-and-bust expenditures. Companies and entrepreneurs, having been burned in the last cycle a few years ago, wait and wait before announcing new capacity. Then, everyone seems to add capacity at once, and a bust occurs again some years later.
It’s pretty obvious that there is a shortage of refining capacity today. No major refinery has been built in the US in the last quarter century (though the majors have increased their capacity by 25%), and many small refineries have been shuttered. The major oil companies, badly burned by $10-20 oil not too many years ago and horrible margins on refined product, have been sitting on the sidelines. Guess who is jumping in, via Reuters:
OPEC president Sheikh Ahmad said the cartel would boost its refining capacity to 32.5 million barrels per day by 2010 from 28.3 million bpd at present. In a series of announcements this week, Kuwait, Saudi Arabia, Qatar and Venezuela all said they would open new plants.
We’ll keep an eye out to see whether this 15% increase in OPEC’s refining capacity is supplemented by new projects in the US, Canada or Mexico. History suggests that it will be.