FUTURE WORLD

On June 21, the Los Angeles Times ran a story that the ever-growing 'Peak Oil' crowd seems to have missed. The article concerned the Shell oil refinery in Bakersfield, California that is scheduled to be shut down on October 1 -- despite the fact that the state of California (and the nation as a whole) is already woefully lacking in refinery capacity.

Now why do you suppose that Shell would want to close a perfectly good oil refinery? It can't be because there is no market for the goods produced there, since that obviously isn't the case. And it isn't due to a lack of raw materials, since the refinery sits, as the Times noted, atop "prolific oil fields." The Scotsman recently explained just how prolific those fields are:

The best estimates in 1942 indicated that the Kern River field in California had just 54 million barrels of remaining oil. By 1986, the field had produced 736 million barrels, and estimates put the remaining reserves at 970 million barrels. (http://news.scotsman.com/index.cfm?id=578462004)

Of course, just because there is a strong demand for a product, and a ready source of raw materials with which to produce that product, does not mean that any corporate entity is obligated to bring that product to market. In the corporate world, the only thing that ever matters is the "bottom line," because corporations exist for one purpose only: to generate profits. So the only question, I suppose, that really matters, is: can the refining of gasoline and diesel fuel at this particular facility generate profits for the corporation?

One would naturally assume, given Shell's decision to close the refinery, that the answer to that question is "no." But that would be an entirely wrong assumption, since the truth is, as L.A. Times reporters discovered when they got their hands on internal company documents, that the refinery is wildly profitable. How wildly profitable? The Bakersfield plant's "profit of $11 million in May [2004] was 57 times what the company projected and more than double what it made in all of 2003." (Elizabeth Douglas "Shell to Cut Summer Output at Bakersfield Refinery, Papers Say," Los Angeles Times, June 21, 2004)

Go ahead and read that again: "more than double what it made in all of 2003." In a single month! And 2003 wasn't exactly what you would call a slow year at the Bakersfield refinery. According to Shell documents obtained by the Foundation for Taxpayer and Consumer Rights, "Bakersfield's refining margin at $23.01 per barrel, or about 55 cents profit per gallon, topped all of Shell's refineries in the nation."
(http://releases.usnewswire.com/GetRelease.asp?id=114-04062004)

Let's pause briefly here to review the situation, shall we? There is a product (gasoline) that is in great demand, and that will always be in great demand, since the product has what economists like to call an "inelastic" demand curve; for many months now, that product has been selling for record-breaking prices, especially in the state of California, and there is no indication that that situation will change anytime soon; there are abundant local resources with which to produce that coveted product; and, finally, there is a ridiculously profitable facility that is ideally located to manufacture and market that product.

Given that situation, what response would we normally expect from that facility's parent corporation? Sit back and let the good times roll? Attempt to increase production at the facility and rake in even greater profits? Sell the facility and make a windfall profit? Or, tossing logic and rationality to the wind, shut the facility down and walk away?

That last one, of course, is what Shell has chosen to do. And this story, believe it or not, gets even better:
The internal documents obtained by the Times, including a refinery output forecast, indicate that Bakersfield will soon be producing far less than its capacity. After relatively high output rates in May and early June, Shell plans to cut crude oil processing about 6% in July and another 6% in August, according to the forecast. Those two months are when California's fuel demand reaches annual peak levels.
Aamir Farid, the general manager of the Bakersfield refinery, was asked the reason for the plan to reduce output at the time of peak demand. Farid claimed that he was not aware of any such plan, but he added that if there was such a plan, "there is a good reason for it." However, he also added that, "off the top of my head, I don't know what that good reason is."

And why would he? Certainly the manager of the refinery can't be expected to know why his facility is planning to dramatically reduce output, can he? The best explanation that Farid could come up with was to speculate that there "could be maintenance planned or projections for a shortfall of crude." Neither of those scenarios are very plausible, however.

Bakersfield, whose suburbs include Oildale and Oil Junction, won't likely be facing a shortfall of crude anytime soon. And as for the notion of planned maintenance, I doubt that anyone actually believes that Shell plans to perform two months worth of maintenance work on a facility that will be permanently shuttered just one month after that work is completed.

To be fair, I suppose it could be the case that Shell, being the benevolent giant that it is, wants to get the place in tip-top shape for the new owners -- except that there are no new owners, primarily because "Shell didn't search out potential buyers for the refinery once it decided to shutter it." Indeed, Shell actively avoided finding a buyer for the plant (which became a fully-owned Shell asset just three short years ago), since any new owner would probably object to the bulldozers and wrecking balls that Shell plans to bring in just as soon as the refinery's doors have closed. ("FTCR uncovered a timetable showing decommissioning and demolition are set to begin immediately after the refinery's shut down date." http://releases.usnewswire.com/GetRelease.asp?id=114-04062004)

Can any of you 'Peak Oil' boosters out there think of any legitimate reason why a purely profit-driven corporation would acquire an outrageously profitable asset and then proceed to deliberately destroy that asset? ... because I have to tell you, I have been struggling to come up with an explanation on my own and the only one that I've got so far is that the corporation might be involved in some kind of conspiracy to manufacture an artificial shortage of a crucial commodity. I know that 'Peak Oil' theory holds that we don't need the refinery capacity because, you know, we're running out of oil and all, but that doesn't explain why a tremendously profitable refinery isn't being kept in operation at least until all the local wells have run dry, does it?

Shell will, by the way, continue to operate its Martinez, California refinery -- for now at least. The Martinez facility is also wildly profitable, showing a "net profit of $34 million in May." That tidy profit was, as it turns out, "just shy of Shell's profit expectations at Martinez for all of 2004." Strangely enough, the Martinez facility, like the one in Bakersfield, "cut crude processing in July, by nearly 10%, a reduction attributed to planned heavy maintenance."

It's always a good idea, I suppose, to schedule heavy maintenance work during times of peak energy demand. That's the kind of intelligent business decision we would expect from a corporate giant with decades of experience in the energy business.

On July 8, the LA Times, armed with yet more internal company documents and an unnamed company whistleblower, revisited the story of the Bakersfield refinery. As of July 1, it was discovered, Shell had "reduced crude oil processing at the refinery to levels 19% below capacity" -- more than triple the unexplained reduction that had been planned for the facility.
(Elizabeth Douglas "FTC Probing Shell's Plan to Shut Refinery," Los Angeles Times, July 8, 2004)

According to both company documents and the unnamed employee, "there were no problems with the plant's equipment," and no other explanation was offered for the radical reduction in processing -- undoubtedly because there is no legitimate reason for the decreased output. So obvious is the company's intent to artificially tighten gasoline and diesel supplies that the FTC was obliged, for the sake of appearances, to step in and pretend to launch an investigation. Shell's response to the investigation has been to delay the closing of the refinery for a few months while it goes through the motions of pretending to find a buyer.

In completely unrelated news, a July 31 LA Times report announced that "profit at ChevronTexaco Corp. more than doubled during the second quarter ... echo[ing] the strong quarterly results reported by other major U.S. oil refiners this week." ChevronTexaco's profit jumped from $1.6 billion to $4.1 billion. Not too shabby. Three days later, the Times reported that Unocal's earnings for that same quarter had nearly doubled, from $177 million to $341 million.
(Debora Vrana "Chevron Profit Soars," Los Angeles Times, July 31, 2004, and Julie Tamaki "Unocal's Earnings Nearly Double," Los Angeles Times, August 3, 2004)

Nobody should conclude from any of this, of course, that inflated fuel prices are attributable to rampant greed and the quest for obscene profits. No, clearly rising fuel prices are a sign of 'Peak Oil.' Just ask Mike Ruppert and Mark Robinowitz. Or better yet, bypass the flunkies and go directly to the scriptwriters at Halliburton and the Club of Rome.