Falling petroleum consumption prompts Japanese refinery closures

Japanese refiner ENEOS permanently closed a 120,000-barrel-per-day (b/d) refinery in western Japan in mid-October, and another company, Idemitsu Kosan, plans to close a 120,000-b/d refinery in March 2024. These closures represent 7% of the country’s refinery capacity and follow long-term declines in Japan’s petroleum consumption as its population ages and shrinks, economic growth slows, and petroleum export competition increases in Asia.

We forecast consumption of petroleum products in Japan will decline to 3.3 million b/d in 2024, which would be the lowest since at least 1980 (Figure 1). Through 2022, Japan’s petroleum consumption has declined by an average of 2% per year since peaking at 5.7 million b/d in 1996, largely on the back of demographic and economic changes, although declining oil intensity has also played a role.

Japan’s population peaked in 2009, and its economic growth has been among the lowest in OECD countries since then. Not only is Japan’s population shrinking, but it is also aging. The share of the population aged 65 and older was 30% as of 2022, compared with 21% in the EU, 17% in the United States, and 14% in China, according to the World Bank.

Oil intensity in Japan is lower than the OECD average. We measure oil intensity as barrels of oil consumed per $1,000 of GDP (Figure 2). Oil intensity represents, in part, aspects like transportation sector fuel efficiency but can also vary depending on what industries dominate the country’s economy. In general, countries with a lot of industrial production, energy production, and agricultural output are more oil intense than economies in which services account for more of its GDP. Japan’s oil intensity declined by an average of 3% annually since the country’s peak oil consumption in 1996, more than the OECD average.

Japan’s refineries were built mainly to serve its domestic fuel needs, and they have trouble competing in international markets. These refineries are smaller and less complex than newer refineries in Asia, including China, South Korea, and India. Complexity refers to a refinery’s secondary processing capacity, such as hydrocracking and coking, which upgrades low-value heavy fuel oil into valuable transportation fuels. More complex refineries can produce more high-value products from the crude oil they process.

About 78% of Japan’s refined product output is transportation fuel; the rest is residual fuel oil, naphtha, and other products. Residual fuel oil typically sells for less than crude oil, but refiners can invest in equipment to upgrade these heavier petroleum fractions into more valuable light products. Whereas Japan’s refined product output is 11% residual fuel oil, U.S. refineries’ residual fuel oil yields are about 2%, and China’s refineries yield about 8%.

Less complex refiners also process lighter and sweeter grades of crude oil, which are more expensive than heavier and more sour grades. The combination of higher yields of lower-value products combined with using more expensive crude oils makes refiners in Japan less profitable and less competitive in world markets. Figure 3 shows differences between simple and complex refiner margins based on sweet and sour crude oil prices and select refined product prices at the Singapore trading hub. Complex refinery margins in Asia can be 30%–50% higher than simple refinery margins.

The larger and more complex refiners in Asia can achieve greater economies of scale, reducing their costs per barrel refined. Refiners in South Korea and India, for example, support large petroleum product exports to countries in Southeast Asia, North America, and Europe.

New refineries in China are often integrated with petrochemical facilities, allowing them to process naphtha and other feedstocks to produce chemicals such as ethylene and propylene. Petrochemical integration not only increases revenues but also minimizes revenue fluctuations by allowing the refinery to switch between fuels or petrochemical production depending on market conditions.

Japan’s declining refinery runs means the country imports less crude oil. Japan imports most of its crude oil from the Middle East. The United Arab Emirates and Saudi Arabia supply more than 75% of the country’s oil (Figure 4). Although combined crude oil imports from these countries have remained about the same compared with before the pandemic, Japan has almost eliminated imports from other suppliers, including Russia, Iran, Iraq, and Indonesia.

In our recent International Energy Outlook, we project Japan’s petroleum consumption will continue to decline beyond 2024, suggesting that refiners will face additional competitive pressures.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.

Tags: consumption/demand, crack spread, exports/imports, international, Japan, oil/petroleum, refining