Energy: Refined out of existence As petrol prices rise and western demand shrinks, refineries are closing across the developed world ©Corbis Tanking market: US petrol demand has fallen since 2007 amid improved fuel efficiency and the impact of a weaker economy. Sunoco petrol stations are a fixture of the US eastern seaboard, their blue-and-yellow awnings touting the brand's status as official fuel of Nascar racing. But after July, none of the petrol they sell will actually be made by Sunoco. The 126-year-old company's decision to quit the refining business is the latest sign of the tumult in downstream fuel markets that is accompanying a global shift in oil use. As consumption flags in developed economies and grows in emerging markets, refineries are dying from Japan to Pennsylvania, the Sunoco home state where oil wells drilled in the 1850s begat the petroleum age. The upheaval highlights the challenges facing policy makers as rising petrol prices endanger growth in the world's biggest economy. Washington has floated largely predictable responses: drill more, punish speculators, work harder towards energy self-sufficiency. But global trading on markets for petrol, diesel and heating oil highlight the persistent fact of America's energy interdependence. Half the refining capacity on the populous US east coast is set to disappear. Sunoco has pulled the plug on two refineries already and warns that another in Philadelphia will close in July if no buyer steps forward. ConocoPhillips is trying to sell a refinery in Pennsylvania, idle since last year. On May 1, it will spin off its refining business. More than 3m barrels of daily refinery capacity have closed in western countries, since the financial crisis, says the International Energy Agency, the west's oil watchdog. Emerging economies have meanwhile added 4.2m b/d in capacity, with another 1.8m b/d coming this year. "It's really a tale of two markets," says Toril Bosoni, IEA senior oil analyst. You have very contrasting pictures for economic growth and demand, and refining is reflecting what's going on elsewhere. A good vantage point is Marcus Hook, a borough of 2,400 people squeezed into Pennsylvania's industrial south-east corner. J.N. Pew, founder of the Sun Oil Company, built a refinery there in 1901 to process crude borne by ships from the legendary Texas gusher known as Spindletop. It was one of many refineries to line the wide Delaware river. "If you were a child who grew up in this region, the refineries have been part of [its] fabric . . . from the first moments of awareness," says Patrick Meehan, a Republican congressman who represents the area. Among his memories: "The smell." Late last year, Sunoco put the Marcus Hook plant on the auction block and stopped feeding it crude after losing nearly $1bn in the past three years at its east coast refineries. The problems began at the docks. Marcus Hook relied on foreign oil delivered by tanker including 34.6m barrels from Nigeria, 5m from Norway, 3.3m from Angola and 3m from Azerbaijan last year, government records show. Low in sulphur and yielding lots of high-value products such as petrol, this was some of the most expensive oil on the planet. Nigeria's Qua Iboe, a representative variety, averaged $114 a barrel in 2011. For several weeks, a barrel of Qua Iboe cost more than a barrel of reformulated gasoline blendstock, ensuring negative margins for refineries such as Marcus Hook. West Texas Intermediate crude, similar in quality, averaged just $95 last year. Texas oil production rose 25 per cent to top half a billion barrels for the first time since 1998. But Marcus Hook could not buy it, as no pipelines link it with Texas. You've got crude oil in this country. It's just a question of getting it to where the refineries are," says Denis Stephano, labour union president at ConocoPhillips's mothballed Pennsylvania refinery. In his union hall, Mr Stephano points to a map of the US's piecemeal pipeline system, which hangs next to a placard reading "Save refineries, save lives!" In Washington, the signature energy battle of the past year has been over the Keystone XL pipeline, which a company wants to build to connect Alberta's oil sands with Texas. This would be likely to raise depressed Canadian prices but would do little to save refineries such as Marcus Hook. Most Canadian oil is too heavy to be processed there. Crude oil prices soared back above $100 a barrel last year as the revolution in Libya halted production. The gains for crude outpaced the rise in petrol prices, which began to rally in earnest only after news of the latest refinery closures in the US and Europe. Petroplus, Europe's largest independent refiner, filed for insolvency in January and has been lining up buyers for five plants. Keeping a lid on refined fuel prices has been weak consumption. US petrol demand has fallen steadily since 2007 as cars became more fuel-efficient, fuel marketers blended more corn-based ethanol into their product and high unemployment kept highway travel light. This wedged refineries between high input costs and a poor appetite for their fuel. "The downstream industry is the flywheel in the oil system," says Kevin Lindemer, an oil industry consultant. Right now we're seeing big changes on both sides of the flywheel. The US story is echoed throughout the west. Oil demand in Europe contracted by 320,000 b/d last year, the IEA says. Emerging-world demand more than offset these falls, led by countries that Barclays has nicknamed "Bics" - Brazil, India, China and Saudi Arabia. In the past five years their oil demand has grown by 5.1m b/d, while demand everywhere else has declined by 1.4m b/d, says Paul Horsnell, head of commodities research at the UK-based bank. India: With no oil of its own, Gujarat fuels the world Perched on the coast of Gujarat in north-western India, Reliance Industries" petroleum mega-complex at Jamnagar is often dubbed "the refining hub of the world." With a daily capacity of more than 1.3m barrels, the facility is both the planet's largest single refinery and an important source of petrol and diesel for fast-growing Asian markets. But for Dhirubhai Ambani, Reliance's billionaire founder, building the complex was also the fulfilment of a lifetime's ambition, as he rose from working-class roots to create one of India's largest and most profitable companies. India liberalised its previously state-dominated refining sector in the 1990s, allowing the tycoon to build the facility. Construction was not trouble-free - halfway through a fierce cyclone hit the area, destroying part of the facility and delaying its opening - but on completion in 2000 the refinery stood as India's largest-ever industrial investment. Mukesh Ambani, the eldest son, added a second, neighbouring plant in 2008, taking the company's total investment to $16bn. Rather than serving India's growing market, the majority of its output is shipped back abroad, in part because the more recently built half of the facility is in an export-only special economic zone, while its coastal location allows for easy access to oil supplies. "The great advantage to being in Jamnagar is three-day shipping for crude from the Middle East," says Sanjay Mookim, an oil and gas analyst at Credit Suisse in Mumbai. Most of their product is then turned around back out to Asia, and especially China, although some of it goes to Europe and elsewhere too. Even with such a huge facility, Reliance cannot protect itself entirely from the vagaries of the global oil market. If refining margins decline, the result feeds through to the conglomerate's profitability, as shown in its most recent quarterly results. Even so, Jamnagar has always aimed at the record books - an ambition that even stretched to increasing the size of a neighbouring forest. A biography of the elder Ambani tells of his asking whether the 66,000-tree mangrove plantation next door was also the world's largest. An executive researched the issue and discovered reports of a Mughal emperor who once owned a 100,000-strong plantation. Reliance promptly ordered more than 30,000 extra trees, just to be sure its complex would be in good company. James Crabtree Politicians have taken up the cudgels over US petrol prices even though by international standards they remain among the world's cheapest. The energy policy plan on the campaign website of Mitt Romney, leading Republican contender for the presidency, says his administration would "permit drilling wherever it can be done safely" but does not mention oil refining. The re-election campaign of President Barack Obama says that he is "moving us toward energy independence." US crude production is at its highest in eight years, helping reduce imports. But the US petroleum market is at once global and regional, underscoring how simplistic ideas of energy independence can be in internationally traded commodity markets. The Gulf of Mexico coast, home to 43 per cent of refining capacity and able to consume cheaper crudes, has turned the US into a net exporter of petroleum products for the first time since at least 1949. The inland US, enjoying a surfeit of fresh crude supplies, has been selling discounted petrol into landlocked markets. The west coast is isolated from the rest of the country, while the east coast has historically relied on imported fuel. "The US is really four markets when it comes to products," says Ed Morse, head of commodities research at Citigroup and a former US oil official. If its refineries close as planned, the east coast will become even more dependent on imported petrol. Europe, which traditionally has extra petrol, could be joined by other exporters to New York harbour, the traditional pricing point for US gasoline. "One of the most probable incremental suppliers is India," the Energy Information Administration, a government agency, says in an analysis. It could take higher prices in east coast cities to draw more fuel carriers across the ocean. Wholesale gasoline last week traded at record prices in Europe, according to Bloomberg. The EIA warns of price spikes: "In the longer run, higher prices and possibly higher price volatility can result from longer supply chains." Sunoco says it is helping cushion against supply disruptions by adding more tanks to a New Jersey refinery it converted into a storage facility in 2011. More storage could also be added to Marcus Hook, but local officials worried about losing tax revenue have proposed a local zoning amendment disallowing the storage of fuels not manufactured on the premises. "We would hope that they recognise this has been a good home to their refinery for 110 years," says Bruce Dorbian, borough manager. What about their corporate responsibility? As big eastern US cities search for replacement fuel sources, Gujarat in India may even hold the advantage over the Gulf of Mexico. The reasons are part infrastructural, part legal. The Colonial Pipeline, the main petroleum products line running from Houston to the north-east, is nearly full. A planned expansion will add less capacity than that of the Philadelphia refinery destined to close. This leaves tankers, which the Jones Act of 1920 requires to fly the US flag and employ American crews if they are ferrying products between US ports. A debate is raging over whether there are enough, or at least cheap enough, vessels to ship fuel eastwards. The EIA says a limited number of Jones Act tankers are free to carry refined products from the Gulf to the east coast, while Jones Act barges can cost three times more than hiring a tanker from Europe. Morten Arntzen, chief executive of OSG, a tanker company, counters: "Transportation is a really minuscule part of the delivery cost of gasoline." The Delaware river oil corridor has been here before. In the 1870s, when capacity was just tens of thousands of barrels a day, "refiners found themselves in a serious plight," according to a Pennsylvania oil industry history by Ernest Miller. Refining capacity was more than double the production of crude. Naturally, few refineries operated at their full rate; many lost money and then shut down. The answer then was the establishment of the South Improvement Company, a precursor to the Standard Oil monopoly. The group colluded with railways in an attempt to drive other refiners to ruin. That scheme today would be not only illegal but impossible, as US refiners compete with others abroad, linked by tankers. Indeed, as refineries have closed in Europe and the US the "crack spread" - the notional profit margin for turning crude into products - has jumped back into the black. This has led to speculation that a last-minute buyer could rescue the large 335,000 b/d Philadelphia refinery. Even as the western refinery industry faces overcapacity, sophisticated operations able to turn cheap, viscous crudes into high-quality products have been expanding. In India, Reliance Industries has built the world's biggest refinery complex at Jamnagar in Gujarat state. Motiva, a joint venture between Saudi Aramco and Royal Dutch Shell, will this year add 325,000 b/d of capacity at a Port Arthur, Texas refinery that will make it the largest in the US. Down river from Philadelphia, a New Jersey company called PBF Energy recently bought two refineries that can process cheaper, heavier crude than their neighbours. PBF, led by Tom O'Malley, a veteran refining investor who until last year chaired Petroplus, says in its prospectus its refineries are "well positioned" to profit from the "continued rationalisation" of refining capacity on either side of the Atlantic. Such benefits, however, are lost on consumers. Refinery closures appear baffling to Americans paying more with each stop at a petrol station. At a battered Sunoco station near Marcus Hook, manager Michele Stamm has been raising prices by six cents a gallon every two days. "It doesn't make sense," she says. A customer, an older local woman, walks in. "Can you imagine what we're going to be paying if all these refineries close?" she asks.