When will gas refineries close?
I asked Bing AI a simple question: If EV sales replace gas vehicles and reduce gas consumption by 50%, what will happen to the price of gas?
The response is at this link:
If the link does not work I added the response below.
Essentially, based on fixed cost, refinery margins and the price elasticity of gas, some refineries will have to stop producing gas and or government will have to provide grants. There is no feasible way to reduce the price of gas enough to increase the volume sold to remain profitable. Also increasing the price of gas will drive the volume sold down faster than the increased price will offset the loss of profits due to the additional loss of gas consumption as consumers will turn to alternatives (EV’s, limit driving…).
At some point refineries taken offline or used for other purposes would allow the remaining refineries to make a profit. However, distribution costs will likely increase as fewer refineries service the same geography.
For gas stations dependent on the sale of gas, many marginal gas stations will close, at least that is my opinion. Note that the gas stations lose more than the profits from gas as there are fewer customers who purchase snacks and drinks because fewer customers drop by for gas. With the loss of 50% of business, many stations will close, and the volume will be picked up by the stations with the healthier business operations.
How fast will the gas consumption drop by 50%? It will not be a linear relationship to total EV’s sold. 20% of light vehicles consume 50% of gas. Two examples illustrate why these use cases will convert to EV’s faster than the average consumer.
Consumers who commute 75 miles each way, require 250 work days times 150 miles round trip or 250*150=37,500 miles. Assume the price of gas is $4.50 and miles per gallon is US average of 25. The cost per year is (37,500/25)*$4.5=$6,750.00. The cost per 100 miles of an EV is $2.55 (tesla model 3) and where cost / kWh is $0.11 or 375*$2.55=$956.25
The savings per year is $6750-$956.25=$5793.75.
Assume the life of the gas car is 200,000 miles or every 200,000/37,000=5.4054 years a new car is purchased and the extra fuel cost is $5793.75*5.4054=$31317.54.
An EV drive train has an expected life of 1,000,000 miles. The expected life of an LFP battery is 1,000,000 miles. Assume 2 gas cars are purchased over 400,000 miles compared to 1 EV. The capital cost savings of $40,000 (price of average car and the same price for Tesla model 3) plus fuel savings over 400,000 miles of 2*$31,317.54=$62,635.08 or $102,635 savings over 10 years.
My assumption is that the economics will drive the % of gas conversion to EV to 90% every 5 years. The consumers with high mile commute will be 90% EV within 10 years.
Police cars often drive 10 to 12 hours per day and the engine is constantly running. The cars are used 7 days a week and travel about 125 miles a day, with no long trips. Many Police cars are retired every 3 to 4 years. The economics to convert from gas cars to EV is as compelling as the high mileage commuter case above. The auto industry is likely to provide 100% coverage of size and features desired by the 300,000 police car fleet in the US within 5 years. Again, my guess is that 90% of the police car fleet will convert to EV within 10 years. Example police car use cases at this link:
The economics for last mile delivery Vans, and Uber and so on are equally compelling.
Due to R and D investments, the price of EV’s will decline and battery performance will improve in terms of range, cost, life and charging times. The economics favoring EV over gas will just get stronger.
Note, you don’t need to convert 50% of the gas vehicles to EV to reduce fossil fuel consumption by 50%. Just 20% where the turnover is 5 years or less and the economic savings is compelling. Add to that general consumer purchases over the next 10 years and gas consumption is likely to fall by 50% within 10 years. The remaining gas vehicles will have a useful life of several more years but will be faced with declining gas refineries and gas stations.
In case the BING AI link above did not work here is the output:
That’s a complex question that depends on many factors. The profitability of a gas refinery is determined by the difference between the cost of crude oil and the value of the refined products, as well as the operational costs and regulatory costs of running the refinery³. This difference is called the **refinery margin**⁵, and it varies depending on the type and quality of crude oil, the type and quality of refined products, the location and capacity of the refinery, and the market conditions and demand for gasoline and other products.
If the demand for gas declines by 50%, it would likely affect the refinery margin in two ways. First, it would lower the price of gasoline and other refined products, reducing the revenue for the refinery. Second, it would lower the demand for crude oil, reducing the cost for the refinery. The net effect on profitability would depend on how these two effects balance out.
According to Forbes¹, refineries in the US have been profiting from the 62% increase in gas prices in 2022, as their margins have increased from $8.27 per barrel in 2021 to $12.84 per barrel in 2022. This suggests that the price of refined products has increased more than the price of crude oil. However, this may not be true if the demand for gas declines significantly, as it would create a surplus of gasoline and other products in the market, driving down their prices.
One way to estimate how much the refinery margin would change if the demand for gas declines by 50% is to use the **price elasticity of supply** for both crude oil and gasoline. This is the percentage change in quantity supplied divided by the percentage change in price. According to a study by James L. Smith, the short-run price elasticity of supply for crude oil is about 0.05, meaning that a 10% increase in price would increase quantity supplied by 0.5%. According to a study by Molly Espey, the short-run price elasticity of supply for gasoline is about 0.25, meaning that a 10% increase in price would increase quantity supplied by 2.5%.
Using these estimates, we can calculate what would happen to the price of crude oil and gasoline if the quantity demanded of gasoline declines by 50%. Assuming that the quantity demanded of crude oil declines by the same amount, we can use the inverse of the elasticity formula to find the percentage change in price:
% change in price = % change in quantity / elasticity
For crude oil, we get:
% change in price = -50 / 0.05
% change in price = -1000%
This means that the price of crude oil would have to decrease by 1000% to reduce quantity demanded by 50%. This is obviously not realistic, as it would imply a negative price for crude oil.
For gasoline, we get:
% change in price = -50 / 0.25
% change in price = -200%
This means that the price of gasoline would have to decrease by 200% to reduce quantity demanded by 50%. This is also not realistic, as it would imply a negative price for gasoline.
These results show that using elasticity estimates based on historical data may not be appropriate for such a large and sudden change in demand. They also show that there are limits to how much prices can adjust to clear the market. In reality, there may be other factors that prevent prices from falling below certain levels, such as production costs, contractual obligations, storage constraints, or government interventions.
Therefore, a more realistic answer to your question would require more detailed information on how refineries and other market participants would respond to such a scenario. Some possible responses are:
- Refineries may reduce their output or shut down some units temporarily or permanently to match lower demand.
- Refineries may seek alternative markets or customers for their products, such as exporting them to other countries or regions where demand is higher.
- Refineries may diversify their product mix or invest in new technologies to produce more valuable or less carbon-intensive products, such as biofuels or hydrogen.
- Refineries may lobby for government support or subsidies to maintain their profitability or viability.
- Refineries may consolidate or merge with other refineries or companies to achieve economies of scale or scope.
These responses may affect the refinery margin and profitability in different ways and over different time horizons. They may also have implications for other stakeholders, such as consumers, producers, regulators, and environmentalists.
In summary, your question does not have a simple or definitive answer
Source: Conversation with Bing, 5/19/2023
(1) Refinery Economics | EME 801: Energy Markets, Policy, and Regulation. https://www.e-education.psu.edu/eme801/node/514.
(2) Economics | McKinsey Energy Insights. https://www.mckinseyenergyinsights.com/resources/refinery-reference-desk/economics/.
(3) As Refineries Profit From 62% Gas Price Pop, Buy Valero Energy … — Forbes. https://www.forbes.com/sites/petercohan/2022/06/11/as-refineries-profit-from-62-gas-price-pop-buy-valero-energy-stock/.
(4) Estimated Gasoline Price Breakdown and Margins. https://www.energy.ca.gov/data-reports/energy-almanac/transportation-energy/estimated-gasoline-price-breakdown-and-margins.
(5) Guide to Oil & Gas Refining & Marketing Industry KPIs — Visible Alpha. https://visiblealpha.com/kpi-guides/oil-gas-refining-marketing/.
