Lower Gas Prices? Not Before This Happens

Oil giant Hess (NYSE: HES  ) made news at the beginning of this year when it announced it was exiting the refining business. The company stated it would sell its Port Reading refinery, or close it down if it couldn’t find a buyer by the end of the month. Now the union representing its employees at its the refinery has launched a campaign to find a buyer and save jobs. There is one other thing that would be avoided if the sale is made: higher gas prices.

East Coast gas
Many refineries on the East Coast were forced to shut down during Hurricane Sandy, which prevented them from building up stockpiles of gasoline for the summer driving season. On top of that, refinery closures in Europe and the Caribbean are affecting volumes as well. Some estimates show stocks of gas are 10% lower than they were last year. If the Hess refinery closes, the pain will be exacerbated; the plant primarily manufactures gasoline and heating oil.

Refineries on the Gulf Coast have gasoline surpluses, but there are logistical problems getting that gas to the East Coast. The Jones Act stipulates that business between American ports must be done by American ships with American crews. There is a shortage of tankers fitting the bill, so that option is out. There is also a pipeline that brings gasoline to the East Coast, but it’s already full. An expansion coming on line this summer could help the situation, but if the Hess refinery closes it won’t make near the impact people need it to.

There is hope
Before, owning an oil refinery on the East Coast was a surefire way to lose money. While refineries in the middle of America and on the Gulf Coast could link up to pipelines carrying cheap domestic crude, East Coast refineries were out of luck. Instead, they were forced to buy oil at world prices, which were much more expensive than domestic crude.

But this story is starting to turn around. It turns out, oil producers can make more money if they put their oil on a train to the East Coast. The market for crude there isn’t as saturated as it is at oil hubs in Cushing, Okla., and Midland, Texas, where much oil used to end up.

Refiners like PBF Energy (NYSE: PBF  ) have built up the rail facilities at their refineries, and now receive that cheaper crude, which means its refineries won’t be shutting down any time soon.

Foolish takeaway
PBF has proven that it is possible to win with East Coast refining, and I would be surprised if Hess is unable to find a buyer for its Port Reading facility. Last year, Delta Airlines (NYSE: DAL  ) bought a refinery from Phillips 66 (NYSE: PSX  ) for $150 million, so stranger things have happened.

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