Could a refinery strike cause a gasoline price spike?


Three of the largest U.S. oil refineries went offline this week in the wake of a month-long labor dispute—the longest in over 35 years. More than 6,500 United Steelworkers Union (USW) members, representing 15 refineries, have participated in walkouts and strikes, citing worker safety concerns and ongoing contract negotiations. Collectively, these facilities comprise more than one-fifth of U.S. oil refining capacity. Over the weekend matters worsened, as union leaders issued walk-out orders to workers at the Motiva Enterprises refinery in Port Arthur, Texas, as well as the company’s Covenant and Norco facilities in Louisiana. These plants refine more than 1 million barrels of oil per day, according to Oil and Gas Journal. USW represents 30,000 total workers who maintain 64 percent of the country’s refining capacity across 65 plants. The union is asking management to replace contract maintenance workers with union members and believes its members are more qualified and better trained to perform the duties necessary to keep equipment running safely. Royal Dutch Shell, negotiating on behalf of the oil industry, says it has put seven offers on the table, all of which have been rejected by the union. In an internal communication obtained by Oil and Gas Journal, Shell explained that its established practice of using contractors supports its flexibility in hiring to accommodate economic cycles and maintenance schedules. As a result, Shell contends that it requires hiring flexibility to protect longer-term strategic investments. The Motiva plant in Port Arthur—the largest in the United States—is a joint venture between Saudi Aramco-owned subsidiaries and Shell. Neither the union nor management are blinking, and further walkouts are still possible. “The industry’s refusal to meaningfully address safety issues through good faith bargaining gave us no other option but to expand our work stoppage,” said USW President Leo Gerard. Fitch, a global ratings agency, said that the recent labor dispute has not affected markets because of strong inventories, a mild winter, and the scheduled January-to-February refinery maintenance season. But it cautions that a prolonged strike could elevate gasoline prices in the long-run: “With gas prices bottoming out and driving season around the corner, a prolonged strike could tighten up gasoline balances,” Senior Director Mark Sadeghian told Fuel Fix. A prolonged strike that lasts until summer driving season—the peak of annual gasoline demand that lasts from Memorial Day to Labor Day—may cause such a spike. Other observers are more sanguine. The Rapidan Group, an independent energy research consultancy, says a prolonged strike would have “little to no impact” due to the basic mechanics of refinery operations. They point to the fact that refinery operations are more capital than labor-intensive to maintain. New salaried staff can be hired and trained relatively quickly. BP is already training replacement workers to supplant the striking USW workforce at its Ohio and Indiana facilities. The oil major says its new employees are being trained to the same standard as any union employee. “I have never seen a refinery strike that has actually resulted in the shutdown of a U.S. plant,” Tom Kloza, global head of energy analysis for Oil Price Information Service told The New York Times. “Management can operate and they have a lot of automated systems.” Rapidan adds that refineries have not trimmed back crude scheduling in affected markets, meaning traders do not anticipate supply disruptions. But the current strike could push back refinery maintenance season, a costly but important period of inspection that temporarily decreases capacity. As a result of the market oversupply of the past six months, the price of West Texas Intermediate (WTI) crude has fallen 50 percent since its mid-summer high. The price collapse has constrained oil producers, sidelined expensive production, and caused industry-wide financial difficulties. At first glance, it may seem strange that the steelworkers are choosing a bad time to pick a fight with the oil industry, amid reports of project cancellations and massive layoffs. However, these upstream challenges don’t necessarily apply to refiners. Data from EIA and Howard Weil show that crack spreads are healthy and haven’t changed significantly since 2014, and Oil and Gas Journal speculates that the “risk premium” driven by the strike could in fact improve refiner margins in the next few months. Thusly, we see little relationship between the current low price conditions and the relative negotiating power of USW. While this particular strike does not appear to be having an impact on retail gasoline prices, it is a reminder that vulnerabilities exist at all points among the oil supply chain.