Don't be surprised if both refineries close, experts say

Updated: Feb. 4, 2013 at 4:58 AM HST
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HONOLULU (HawaiiNewsNow) - Economists think the closure of the Tesoro refinery was unavoidable, given the small size of Hawaii's oil market and the state's pursuit of alternative energy policies designed to make the local oil market even smaller.

"The total refining capacity of both facilities," says the UH Economic Research Organization in a research report, "has exceeded Hawaii's demand for refined products for quite some time, and Hawaii's demand for oil is actually expected to shrink further."

Oil refineries are more profitable when they have enough size to achieve economies of scale in their fundamental operating costs. Hawaii's refineries are small, capable of a combined throughput of 150,000 barrels per day. Average refinery capacity is 400,000.

They also face diminishing demand in a state that subsidizes solar power and electric cars. "What did you expect?" says economist Paul Brewbaker. "These refineries have been operating in a market where the government is actively trying to reduce their business."

Hawaii refining capacity already exceeds consumption. The smaller Chevron refinery was built in 1962. The larger Tesoro refinery - with 75 percent more capacity - was built in 1970. Tesoro is the third company to own it.

"It is clear that the closure of at least one of Hawaii's refineries was expected, and barring some significant improvement in the local refining industry Chevron may very well follow Tesoro's conversion to an import facility," says UHERO.

UHERO predicts there will be little if any change in fuel prices when the Tesoro refinery closes and sees the same effect on any subsequent closure of the Chevron refinery because of the ready availability of already-refined gasoline and diesel on the West Coast, but notes that the picture might be different for Hawaiian Electric, which needs a less widely available high grade of fuel for its power plants to meet EPA pollution standards.

The main economic impact of the closure of one or both refineries, if this is correct, is the loss of 100 jobs when Tesoro converts, and more if Chevron eventually does.

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