After more than a century of churning out fuel on the banks of the Houston Ship Channel, the city’s oldest refinery is preparing to shut down, potentially putting hundreds of people out of work. Its competitors are welcoming its demise.

The closure of the plant — built by industrialist Harry Sinclair in 1918 and now owned by petrochemicals giant LyondellBasell Industries NV — reflects the struggles of a sector that’s declining along with demand for its central product. 

Gasoline consumption in the U.S. peaked five years ago, according to federal data, and the transition to cleaner energy is eroding demand for other fuels, too. That’s turned the refining industry into a Darwinian battleground in which only the fittest survive. 

Lyondell has faced stiff competition. When the Sinclair refinery began operating a century ago, the plant was little more than a cluster of pipestills on a swampy watershed, and the Houston Ship Channel had just opened as a deepsea port. 

Now, the refinery is part of a massive petrochemical corridor and is one of 10 fuelmakers in Houston, many of which are modernized megaplants that have been retooled to process light oil from the Permian Basin. To stay viable, Lyondell would have had to sink significant capital – as much as $2 billion, according to RBN Energy Refined Fuels Analytics division – into improving the aging plant. After trying and failing to sell the refinery, the company in 2022 announced it would cease operations.

It’s not alone. Phillips 66 plans this year to close its Wilmington, California, refinery after shutting a hurricane-damaged Louisiana plant in 2021, and several other refineries are vulnerable. That’s on top of nearly 1 million barrels a day of refining capacity that shuttered after pandemic lockdowns decimated gasoline demand. 

But the string of closures belie the reality of today’s market: Refining profits actually aren’t that bad. By one measure, they’re about 20% higher than the 10-year average. And in the aftermath of the pandemic, when oil prices tanked but fuel demand was resurging, those profits soared to record-high levels.

That post-pandemic jump in refining margins even prompted Lyondell to keep the Houston refinery running for more than two years following its closure announcement. That’s about as long as they could safety operate without investing in costly maintenance and upgrades. 

Put simply, refineries don’t shut down because their margins are bad. They do so because the can’t justify the cost of upkeep.

“If I was looking at a several hundred million-dollar capital expense that I would want to pay off over five or 10 or 20 years, that is where I might start considering the pressure that declining demand will put on margins,” said Austin Lin, principal analyst refining and products North America at Wood Mackenzie.