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Low Gas Demand Sparks Uncertain Future for Refiners

NEW YORK -- The decline in gasoline demand this year has contributed to the closings of five oil refineries in the U.S. this year, including plants in Delaware, New Jersey, California and New Mexico -- a signal that the business of oil refining is mired in a deep crisis according to a report by The New York Times.

Gas demand, which some analysts had long expected to keep rising for decades, is down sharply in the recession, and some refiners are convinced that even after the economy recovers, demand will not grow as it had due to the rise of alternative fuel supplies and tougher efficiency standards for vehicles, the report stated. Some energy experts have said gas consumption most likely peaked in 2007, reaching 9.7 million barrels a day, and will not rise to that level again.

And government mandates for ethanol are expected to grow through 2022, while biofuel supplies are expected to reach 15 billion gallons in 2012 and 36 billion gallons in 2022, the report stated.

The recent drop in gas demand could result in more refineries being closed in the coming year, analysts told the newspaper. Approximately 700,000 barrels a day of refining capacity have been idled or shut down in North America in the last year, according Aaron Brady, an oil expert at IHS Cambridge Energy Research Associates, who was cited by the Times.

"We have too much capacity," Lynn D. Westfall, the chief economist at the Tesoro Corp. told the Times. Westfall also estimated the industry's capacity of 18 million barrels a day must be cut 5 percent to 8 percent. "We need refineries to be shut down."

The 2009 refinery closings mark the end of a period from roughly 2004 to 2008, when demand soared, refineries operated near capacity and profits swelled. But for drivers, gasoline prices stood at $3 or $4 a gallon, especially when refining capacity on the Gulf Coast was shuttered due to hurricanes, the Times reported.

The number of U.S. refineries fell to roughly 150 in recent years, from more than 300 in 1982. Meanwhile, the nation's refining capacity grew by approximately 13 percent, as the most efficient refineries were expanded, the report stated.

But recent shutdowns are so rapid the country is losing capacity as refiners struggle to match output to falling demand. But even as demand for gas falls, the product is still pricey due to high oil prices. Gasoline prices dipped to an average of $2.58 a gallon recently, the newspaper reported, citing the motorist group AAA, and many analysts predicting further declines this winter.

In the political realm, the refining industry is facing an administration that encourages alternative fuels use and reduction in the use of gasoline. And climate-change legislation on its path through Congress has refiners concerned over higher costs imposed on the industry, with more gas imports coming from lower-cost refiners overseas, according to the report.

All of these factors leave refiners with difficult choices -- cut costs, try to sell plants or shut down unprofitable refineries.

"The industry is on its collective knees right now," Charles T. Drevna, president of the National Petrochemical and Refiners Association, said in the report.

The Valero Energy Corp. the nation's largest refiner, revealed plans this month to shut down its refinery in Delaware City, Del.

"The golden age of refining -- if it ever existed -- didn't last very long," said Bill Day, a spokesman for Valero, in the report.

In an effort to diversify, Valero recently bought several ethanol refineries.

"We recognize that ethanol is an important side of the fuel mix that is not going to go anywhere," said Day. "That's where the future of demand growth and transportation fuels will be."

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