30-05-04
The US oil industry is absolutely certain that the high price of gasoline is
the fault of OPEC and its production quotas. OPEC suggests that the industry
look at the refineries in its own back yard. But Lawrence Goldstein, president of the Petroleum Industry Research
Foundation, thinks OPEC may have a point. Goldstein said the US oil industry
needs new refineries. The real issue, he says, is not oil production quotas, but
lack of refining capacity.
Refineriesnow operate at 96 % of capacity, whereas the average US
manufacturing plant operates at 76.7 % of capacity. Since 1981, when refineries
operated at 69 % of their capacity, the number of refineries in the US has
dropped from 324 to 153.
At least three refineries proposed on the East Coast in recent years couldn't
get off the ground, creating a chilling effect for such projects, Goldstein
said. As a result, the US has become increasingly dependent on imports of
finished petroleum products, especially gasoline and jet fuel. The reliance on
imports comes even as American refiners have added 1.5 mm bpd of capacity since
1994 by expanding and improving existing refineries in a strategy known as
"capacity creep."
The American Petroleum Institute says a new refinery has a $ 1 bn price tag
and a 10-year timeline for completion.
Between 1992 and 2002, the rate of return for US refiners was about 5.5 %,
compared with a 12.7 % rate of return for the industrial sector of the S&P
500 companies, according to the Petroleum Institute's Dougher.
The Marathon Ashland Petroleum refinery in Garyville, Louisiana, on the banks
of the Mississippi River, is the newest US refinery to be built from the ground
up. It was built 28 years ago. In Illinois, where two refineries, in Blue Island
and Downstate Hartford, have closed in the last three years, tight capacity has
caused Gov. Rod Blagojevich to take dramatic action in the face of glitches to
ensure that supply keeps flowing.
A week after Blagojevich's action, ConocoPhillips received a permanent permit
from the Illinois Environmental Protection Agency to operate the Hartford unit.
The Hartford and Blue Island refineries had been owned by Premcor, and their
closure took 145,000 bpd of capacity out of the region.
Similarly, earlier, in a last-ditch effort to keep open a Shell Oil refinery,
California Attorney Gen Bill Lockyer hired a consulting firm to help find a
buyer for it. The plant makes 2 % of California's gasoline and 6 % of its diesel
fuel, a significant amount in that state's tight market. But Shell said it was
inefficient and plans to close it in the fall.
Over the last decade, more stringent environmental regulations have caused
the refining industry to invest $ 49 bn to meet new fuel specifications,
according to the Petroleum Institute.
Source: Chicago TribuneLack of new refineries also factor in high gas prices
"The fact is that the cost of a barrel of crude oil has increased from $ 25
a year ago to $ 41 today -- that's [nearly] a 40 cent-per-gallon increase,"
said Rayola Dougher, senior policy analyst for the Washington-based American
Petroleum Institute. She noted that the Federal Trade Commission has attributed
80 % of the increase in gasoline prices to the price of crude oil.
"There is no spare refining capacity in the US today and that means"
that the usual supply and demand balancing act has been thrown off kilter,
Goldstein said.
Goldstein noted that before the last decade, whenever prices went up, US
refiners could rush to make more gasoline -- or pull supplies from discretionary
inventories to meet demand, moves that eventually led to lower prices. Now
prices simply are propped up until there is a drop-off in demand.
And ExxonMobil CEO Lee R. Raymond said that new refineries are years away from
being built.
"You would have to have confidence over a long period of time that refining
margins would stay at a level to support" a multibillion-dollar project
that would take years to complete, Raymond said after the company's annual
meeting in Dallas.
"There's no quick fix," Raymond said.
Even widening refinery profit margins as a result of soaring gasoline prices
aren't enough to spur new refinery construction, said Raymond, who noted,
"There is no period in history over the last 50 years when that has been
the case."
Raymond argued that "capacity creep," largely achieved through new
technologies and efficiencies, could make building new refineries even less
economically attractive. After all, without building new facilities the nation's
largest refineries have expanded crude oil processing capacity by about 1 % to 3
% a year, he said.
If that "capacity creep" continues at a rate to adequately supply the
US market with gasoline and other fuels, the result will be "downward
pressure on the margins to the point where it would not support"
construction of a new refinery, Raymond said.
Earlier, when operating problems at ConocoPhillips' Wood River refinery
threatened to take 700,000 gallons of summer-blend gasoline off the Chicago
market, Blagojevich granted a temporary permit to allow the oil company to
reopen a refining unit at the adjacent closed Hartford refinery, part of which
it bought late last year.
ConocoPhillips' acquisition did not restore any lost oil production because it
merely shifted production from a less efficient unit it already owned to the
Hartford facility. Illinois has gone from 11 oil refineries to 4.
"We will continue to see shutdowns of small inefficient refineries that
can't compete," said Joanne Shore, senior analyst with the Energy
Information Administration.
"We do believe we will see refinery expansion continue," Shore said.
However, she doesn't see entirely eye-to-eye with ExxonMobil's Raymond, who
heads the world's largest publicly traded oil company.
"I'm certainly not worried about an oversupply of refining capacity,"
she said. "And from a consumer's point of view, it keeps supply relatively
tight and limits surge capability. It means that prices will be relatively high
before extra imports or refinery supplies can make up for supply
disruption."