Refining the Battle Against High Gas Prices Lieberman Op-Ed from Tech Central Station by Ben Lieberman April 19, 2004 Everyone knows that America imports more than half of the oil it uses, but few are aware that the nation also imports some of its gasoline. As a consequence of inadequate domestic refining capacity, approximately 10 percent of America's finished gasoline (and refined gasoline components) is shipped in from Canada, Venezuela, the Caribbean, and Europe. While the need for "energy independence" is often overblown, in this case the growing reliance on foreign refineries does not bode well for the future price of gasoline. Despite steadily increasing demand for gasoline and diesel fuel in the US, the last domestic refinery was built in 1976. One reason is the substantial regulatory barriers and costs involved in constructing a new plant and operating it in compliance with the applicable Clean Air Act (CAA) regulations. With regard to the latter, the CAA places a double burden on refiners—strict motor fuel requirements that make gasoline more difficult to produce, and a slew of tough restrictions on refinery emissions. Even with today's high gas prices and strong industry margins, no serious proposal for a new refinery is on the drawing board, and few expect one any time soon. Until recently, most of the slack has been taken up by capacity expansions at existing refineries. But this has not been easy either, and in fact was made more difficult since 1999 as a result of a Clinton administration crackdown on numerous refiners, claiming violations of the CAA. Refinery utilization rates hover around 95 percent, very high for any industry. This is a sign that expansions have barely kept up with rising demand. And even that may no longer be true. "Refinery capacity has not expanded significantly since last summer," according to a recent report by the Department of Energy's Energy Information Administration (EIA). Enter foreign refiners, who have been serving American markets for years but who now play a vital and growing role providing Americans with the additional gasoline that domestic refineries cannot. These refiners have the advantage of operating free of the CAA's requirements, though their products must meet all US specifications. As much as 25 percent of the Northeast's gasoline comes from abroad, making it the region most dependent on foreign supplies. But, just as America is placing increased reliance on non-US refiners, some of those refiners are no longer up to the task. The reason is that federal gasoline requirements continue to get more complicated. In addition to the regulations already in place, the EPA is almost constantly phasing in new ones, such as the low sulfur requirements for motor fuels that took effect at the beginning of the year. As the US goes further and further down the path of complex, mandate-laden gasoline recipes, fewer offshore refiners are willing to make the investments necessary to produce these specialized blends. By one estimate reported in The Houston Chronicle, the new sulfur standards have taken as much as 150,000 barrels a day off the market, a small fraction of the 9 million barrels America uses each day but enough to make a difference when the market is already tight. Looking ahead to summer, EIA forecasts a slight increase in imports that will only partially satisfy sharply higher demand, as compared to last summer. EIA concludes that "incremental foreign supplies may be hard to come by and are expected to be costly." This could contribute to higher summertime prices, particularly in the Northeast. Looking even further out, EIA forecasts that demand for petroleum products will increase by 1.6 percent annually for the next 25 years. This fuel will have to be refined somewhere, but where and how is hard to fathom given the current trends.
Oh, so that's what they're saying this year. Next year it will be the cotton shortage in the underwear industry.
More: Why High Gas Prices? by Doug French by Doug French The government has no business stockpiling anything, including oil. But when three socialist amigos like Senators Charles Schumer of New York, Barbara Boxer of California and Harry Reid of Nevada all urged the Bush administration recently to help ease gasoline prices by releasing oil from the Strategic Petroleum Reserve (SPR), you know what’s up. These three are all facing the voters come November, and they know from their many years in politics that nothing agitates the boobeoisie and engenders conspiracy theories like high gas prices. Reid is "extremely concerned" and believes that gasoline prices in Nevada may be going up because of "possible market manipulation" and price gouging. "The big oil companies say it’s just a matter of supply and demand. That’s the same thing Enron said," Reid told the Las Vegas Review Journal. "I don’t think we can take the word of the oil companies." Philip Verleger, from the Institute for International Economics believes that draining the SPR might lower prices 20 cents per gallon, plus another 10 cents if the reserve were not replenished. Thus Mr. Reid would like to do just that to give motorists some relief while he and his friends on capital hill start their oil company–witch hunt. You’d think that Martha Stewart owned Exxon the way he’s acting. Reid forgets that Bill Clinton tried that trick in 2000 and the effect at the pump was negligible. Of course, if the good Senator really wants to give Nevada drivers some relief, why not suspend gasoline taxes? The federal tax on gasoline is 18.4 cents per gallon. Then the State of Nevada, on top of that, levies another 33.7 cents. That’s 52.1 cents a gallon going to the government. Thus residents of the Silver State today pay the third highest gasoline tax in the nation – behind only New York and Hawaii. Of course, Californians pay nearly as much as Nevadans – over 50 cents per gallon. Interestingly, the three Senators looking to drain the SPR for their political gain are from states with the highest gasoline taxes, as well as the highest gas prices in the nation. Unfortunately government’s impact on gasoline prices doesn’t stop with taxes. Stringent new blending regulations have served to curtail the amount of gasoline being imported from foreign refiners. "Some overseas refiners may be unable to meet new U.S. fuel-blending specifications," wrote Leia Parker in the March 29th Barrons. "Others may simply be unwilling, preferring to send their fuel to Asia, where demand is rising, too." The Environmental Protection Agency has lowered the amount of sulfur allowed in gasoline. At the same time, the additive methyl tertiary butyl ether has been prohibited in gasoline sold in California, New York and Connecticut due to water-contamination concerns. As Parker reports, these states have substituted ethanol which is more difficult to transport and can not be blended in refineries. The EPA’s sulfur rules will likely limit imports by as much as 150,000 barrels a day according to A.G. Edwards senior analyst Bruce Lanni. Because inventories are thin and demand is high, the 150,000 barrels, which is 1.7 percent of daily U.S. demand, could cause big price increases. The American Automobile Association issued a press release questioning the federal governments policies on gasoline refining that have resulted in more than 15 different varieties of gasoline being used across the country. "While these ‘boutique’ fuels have helped clean the air, they also have seriously hampered the efficient production and distribution of gasoline," AAA said. That’s a gutsy statement from AAA, essentially questioning the value of cleaner air. Sierra Club members must be in Joan Crawford–mode after hearing those comments. Of course, AAA represents 47 million average Americans, who only want to be able to afford driving their cars. Finally, because of government restrictions, oil production in the United States is in decline while demand continues to accelerate. According to the Oil and Gas Journal, U.S. proven oil reserves have declined by around 20% since 1990, with the largest single-year decline (1.6 billion barrels) occurring in 1991. During 2003, the United States produced around 7.9 million barrels per day (MMBD) of oil, of which 5.7 MMBD was crude oil, and the rest natural gas liquids and other liquids. U.S. total oil production in 2003 was down sharply (around 2.7 MMBD, or 25%) from the 10.6 MMBD averaged in 1985. U.S. crude production remains near 50-year lows. Harry Reid and his friends in the Senate are the ones gouging customers at the gas pump, not the oil companies.
It does seem ridiculous to have so many different requirements across the United States for gasoline, etc. Seems like there should be one standard nationwide for each grade. Even if that meant that a lot of states would end up with a higher standard than they have now, it would still make sense to standardize the standards. By the way, the first article Behad posted mentioned that refineries were working at near-capacity in the U.S. Does anyone know why there are so many fewer refineries than there were say... ten years ago? I mean, when you've shuttered forty something refineries, it would seem that capacity would rightly go down. According to the DOE, in 2002, the overall refinery capacity in the U.S. was justunder 14.8 million barrels per day. In 1992, it was about 15.6 million barrels per day. In 1982, it was 17.9 million barrels a day. Maybe it's just me, but it seems like cutting off capacity is the wrong way to go, but it appears that capacity has consistently gone down (despite the modernization and expansion of refineries mentioned in the first article Behad posted). I have no doubt that the price of gasoline is a supply and demand thing, but I do wonder if companies are manipulating the supply. My fear is that we're past the point of true competition in the industry. We've got an oligopoly, and we'll simply have to get used to higher prices until competition is injected back into the industry.
Because it's too frickin expensive to run a refinery and make a profit. Government regs in conjunction with foreign competition makes it a losing proposition to build or expand refineries in the US. The safest place for oil companies in the US to put their capital is into maximizing existing facilities. I'm not defending big oil here. They are making a HUGE amount of profit during these types of situations. Couple that with "_"'s favorite whipping boy, PACE and the price of labor, and the idea of building new refineries is just a distant dream.
Another answer to your question, mrpaige: http://money.cnn.com/2004/04/26/news/international/refining.reut/
yeah yeah... to think in grade school i was a math champ. gone are those days. anyway... i think i've figured out what it stands for.
<img src="http://www.butlerwebs.com/automotive/images/gasprices.jpg"> <i>(the sad thing is, this picture is from the last time gas prices were high, a few years ago... the regular price on that sign would be a bargain now. )</i>
But wouldn't oil companies want things to be this way? Excess capacity drives down prices, which causes the unprofitability in the first place. It would seem to me that they'd want to continunally work as close to full capacity as possible and bring in the optimum price. I mean, if they build more capacity, they being the price down which would make it that much harder to be profitable. In 1982, when there was far more capacity, the oil companies weren't exactly loving it. And looking at the DOE reports, it appears capacity has pretty steadily dropped since the oil bust in 1981-82 after hitting a peak in 1981. I still say that every competitor taken out of the business reduces competition. Even if all the environmental laws were scrapped tomorrow, what incentive would the big oil companies have to invest in more capacity? It's still an expensive proposition and one that will lower prices, possibly to the point that there's a net decrease in profits for the company (and you mention foreign competition. Isn't a lot of the worldwide market controlled by the same companies that control the refineries here in the U.S.?)
Doesn't this post answer your original question of "Does anyone know why there are so many fewer refineries than there were say... ten years ago?" Not sure what you are looking for with your latest post.
You guys must drive an SUV like me, you got to love that 14miles/gallon when you have filled up the tank for the second time that week.
Well, I know for certain I'm avoiding purchasing that Tahoe / Expedition I was all gung ho about last week. I'll stick to my 'stang for now.
Just saying that I don't think environmental regulations, etc. are the only cause for the dwindling capacity over the last twenty years, and maybe not even the prime reason. And that maybe we're going to be stuck with higher prices until some competition is injected into the industry.
