Refinery Strike Not Likely to Boost Crude Oil Prices

Walkouts have hit the Royal Dutch Shell PLC (NYSE: RDS-A) Deer Park refinery and chemical plant, the Marathon Petroleum Corp. (NYSE: MPC) Texas City refinery, and a LyondellBasell Industries N.V. (NYSE: LYB) refinery, all near Houston. Another Marathon refinery in Kentucky and a co-generation plant in Texas City were also affected. Three refineries owned by Tesoro Corp. (NYSE: TSO) in Washington and California are also being struck.

Shell is the lead company in the union’s negotiations with the industry in the National Oil Bargaining talks. Any agreement made would also affect other companies with U.S. refining operations.

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The steelworkers union represents workers at 65 U.S. refineries and more than 230 oil-industry related facilities in the United States. The refineries and other facilities that are not affected by the strike continue to operate under a rolling 24-hour contract extension. A union executive said:

This work stoppage is about onerous overtime; unsafe staffing levels; dangerous conditions the industry continues to ignore; the daily occurrences of fires, emissions, leaks and explosions that threaten local communities without the industry doing much about it; the industry’s refusal to make opportunities for workers in the trade crafts; the flagrant contracting out that impacts health and safety on the job; and the erosion of our workplace, where qualified and experienced union workers are replaced by contractors when they leave or retire.

The seven refineries represent about 1.94 million barrels a day of capacity, or about 10% of total U.S. refining capacity, with the three refineries in Texas accounting for 1.05 million barrels. About 64% of total U.S. refining capacity is operated by members of the steelworkers union.

Refinery operators plan to keep the plants functioning with skeleton crews consisting of management staff. The Tesoro refinery in Martinez, Calif., was already in turnaround and half the plant was shut down for planned maintenance. The company has said that the safest option is to shut the plant down completely.

Crude prices moved down a little on news of the strike, but spiked above $50 a barrel briefly early Monday morning. We noted over the weekend that crude prices jumped 8% on Friday, largely due to the sharp drop in the number of drilling rigs working in the United States. Some analysts are also saying that short covering drove the price up late Friday and is also responsible for the surge Monday morning.

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Unless the strike is called nationwide — and that is still a real possibility — crude prices and, ultimately pump prices, should not be affected much. If the strike actions widen and the strike lasts for a longer time, that could change quickly.