Gasoline Refiners Have Trouble Listening and Thinking

I’m a little mystified by the way gasoline producers approach issues of supply and demand.

A key lean principle is to produce what the customer wants and – ideally – exactly the amount the customer wants. No more, no less.

But production of gasoline seems to be based primarily on the price producers can get, not necessarily on how much the consumer wants. In addition, the decisions some companies are currently making about production don’t seem entirely rational.

A recent posting in the Environmental Capital blog of The Wall Street Journal notes that both oil and gas prices have fallen sharply. But the cost of turning crude oil into gasoline remains high. The result:

Turning crude oil into gasoline is now a money-losing business. A barrel of refined gasoline is worth $2.84 less than a barrel of oil, Reuters reports; earlier this year, gasoline fetched a hefty premium of more than $30 a barrel.

As a result, some refiners, including Sunoco, have cut back production. But not all.

What’s surprising is that U.S. refineries are still producing so much despite the dismal economics. Though U.S. gasoline production slipped last week, refiners still produced more gasoline in mid-October than they did at the same time in 2007, even though demand for gasoline has dropped dramatically in recent months. The outlook for 2009, with a recession looming, isn’t any brighter.

There seems to be a real disconnect between what refiners think should be produced and consumer demand. That shows an absence of lean thinking on the part of the refiners, who should be focusing on what (and how much) the customer wants.

There is also an absence of lean thinking on the part of Keith Johnson, who wrote the blog post. He says:

Given gasoline’s poor returns right now, refiners have a couple of options—and neither one would be good for American drivers recovering from record-high gasoline prices. They can take capacity off-line, as Sunoco is doing, in the hopes that “standing on the hose” will keep gas prices steady. Or they can try to re-jig refinery output to focus on products that offer better returns, such as diesel or jet fuel.

He left out the third, lean option: Improve the processes by which gasoline is produced to lower the cost of those processes, so it is still possible to make a profit (or at least lose less money) selling gasoline at lower prices.

Maybe the recent drop in consumer demand for gasoline will serve as a wake-up call for the refiners. We can hope.