Outsourcing fuel production

Last year, I can't remember where but it was a discussion about Just in Time in the oil industry, I suggested that it was probably more profitable to refine gasoline abroad and ship in just the finished gasoline, or at least gasoline less the final blending additives. Why? Because a shipful of oil is essentially gasoline plus some useful additives plus a lot of junk. Why should we pay to ship the junk? We also have to find someplace to dispose of it. Wouldn't it make more sense to just ship that part of the oil that we want (gasoline being primary)?

It turns out that some foreign oil tycoons have figured this out and are making it work for two reasons. Not only is the explanation above true, but expected demand is rising in places like India and China, reducing the risk of building new refineries abroad for export to the US. According to Steve Levine and Patrick Barta in today's WSJ (subscription required?), Mukesh Ambani is guiding Reliance Industries into a very lucrative market to take advantage of this 2-for-1. According to EIA figures cited in the post, gasoline imports into the US have risen from 7% to over 12% of the market between 200 and 2006. The gap between what refiners (including US refiners) pay for a barrel of oil and what they get for the refined products has risen from $3 to $13, drawing new competition into the market.

technorati tags: energy "Just In Time"