Europe pays the price for lack of oil refineries

The largest European nations have paid about 10 per cent more than the US for the oil they consumed during the first half of …

The largest European nations have paid about 10 per cent more than the US for the oil they consumed during the first half of the year as less sophisticated refineries force Europe to import premium high quality oil.

Germany, France and the UK paid $47.40 a barrel on average for the oil they consumed between January and June, while the US paid $43.10 a barrel, according to data from the International Energy Agency, the industrial countries' oil watchdog.

This translates into an additional $4.8 billion spent by these three leading European economies on oil imports.

Refineries require complex and costly facilities to distil cheap low-quality oil, also known as heavy sour crude, into the petroleum products, such as petrol or diesel, that are in greatest demand.

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These so-called conversion facilities are common in the US, but less abundant in Europe. They represent about 45 per cent of total north Europe refinery capacity, well below the 75 per cent in the US.

A large amount of conversion capacity makes it easier for US refineries to handle cheaper oil imports from Venezuela or Mexico, whose output is largely low-quality oil. European finance ministers have urged oil companies operating in Europe to boost refinery investment. French finance minister, Thierry Breton, will meet oil companies tomorrow to discuss investment plans. "Several companies haven't invested enough in refining," Mr Breton said yesterday.

Francisco Blanch, senior oil strategist at Merrill Lynch in London, said that the US had invested more in refinery conversion because it was surrounded by low-quality oil producers.

European refineries in contrast have concentrated their investment of recent years in complying with strict new environmental regulations. Narrow differentials between high and low-quality oil in the 1990s also discouraged investment in conversion capacity. But with high-quality oil, such as that pumped from the North Sea, becoming scarcer, demand for it has pushed up prices.

The differential between the prices paid by the US and Europe, traditionally below $1 a barrel in the late 1980s and 1990s, has jumped to $4.20 a barrel so far this year.