SAN FRANCISCO (MarketWatch) — Not just U.S. jobs are heading overseas. So are the nation’s refineries.
Not literally, of course. But Sunoco’s SUN -0.33% decision to quit refining oil is the latest example of the decline of the U.S. refining industry. Read about Sunoco's plan to exit refining.
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What began as the Sun Oil Co. has been in the petroleum-refining business for more than a century. On Tuesday it announced that two cornerstones of its business, the Marcus Hook and Philadelphia refineries, are up for sale. The company said it wants to concentrate on marketing and logistics, which means storing, selling and delivering fuel.
What the company is really saying is that the refining end of the business, stuck between high oil prices and a weak economy, is just too much risk and not enough reward.
This isn’t new. Sunoco is joining a process that started decades ago when independent, regional refiners could no longer compete with the likes of Exxon Mobil XOM -0.01% , Chevron CVX +0.07% and Shell RDS.A -1.91% . They lacked the economies of scale enjoyed by the big , vertically integrated companies. And with little or no production of their own, enormous pressure was put on their oil-trading desk to secure a cheap, steady supply of crude.
At the same time stricter pollution standards and the need to continually upgrade their facilities shaved profit margins to the bone. Increased volatility in global oil markets didn’t make things any easier.
The net result was that refining and marketing, or the “downstream” end of the business, became concentrated in ever fewer hands. Marathon Oil MRO +1.00% and ConocoPhillips COP +0.15% are among those now making similar moves to quit or spin off this part of their business.
Meanwhile, what’s taking shape overseas is accelerating the trend.
Petro-Canada's Edmonton Refinery and Distribution Centre glows at dusk in Edmonton in this file photo.
Much of the world’s new refining capacity is being built abroad, typically by state-run oil companies that have plenty of crude but no downstream industry. Rather than ship their oil halfway around the world to be processed by someone else, they’re building their own refineries, exporting finished petroleum products to higher-growth markets in Asia, for example, instead of old, slow-growth markets like the United States.
National oil companies have better margins for several reasons: proximity to their own oil fields, lax environmental standards, cheaper labor and the fact that they, like vertically integrated oil companies, have greater control over the price they charge their refining units for the oil they pump out of the ground.
For a company like Sunoco, that’s a game they’re no longer willing to play. Not many others are, either, which is why Sunoco said that if it hasn’t sold its Pennsylvania refining operations by next summer, it will simply shut them down.
There’d be no reason to say that if they figured it would be an easy sell. But investors still think it’s the right move. Sunoco shares were up 6%, one of few stocks to show a gain during a tough session for equities.