By Michael D. Tusiani

02-05-04 Higher prices show that our insatiable demand for gasoline is catching up with our willingness to produce it. The price of gasoline rose over the winter, but that was just the beginning of an inevitable upward trend. Summer will give us an even better feel for things to come. Complaints by motorists and accusations by politicians will not avoid the unavoidable: Most Americans simply cannot have all the gasoline they want much longer.
We already burn more of this precious but cheap commodity than US refineries can make. For the past two years, imports climbing toward 1 mm bpd have kept supply in step with consumption. But within three years, we'll be extracting as much from foreign suppliers as they can spare. At that point, demand cannot continue to grow at the current pace. It cannot exceed supply.

When demand hits the ceiling, some of us, or all of us, will use less. Government may impose a rationing scheme (which seems unlikely) or price will allocate supply. Those who can afford it will get as much as they want. Others will not.
For some reason, America's politicians and special-interest groups never mention the limits of oil companies' capacity for making gasoline. The domestic refining industry has not grown significantly for years, and it will probably shrink in years to come. Plant emissions rules, community hostility and a series of money-wasting betrayals by regulators discourage expansion.

So does the burden of paying for equipment to make fuels that comply with clean air rules for a marketplace so competitive that investments do not earn any money. Worse yet, these conditions encourage closure of marginal facilities. Many consumers say they won't cry for the big, rich oil companies. If so, they'll cry for themselves in the gasoline line -- or leave the keys in their SUVs, hoping they'll be stolen.
America burned 8.93 mm bpd of gasoline in 2003, 8.14 mm barrels of it produced by domestic refineries. If US refineries operated at peak gasoline output despite seasonal swings in motor fuel sales, they might sustain 8.7 to 8.8 mm bpd of production, assuming their equipment could take the stress. In years to come, regulations, among them the measures that force ethanol into the motor fuel supply, will reduce the amount of gasoline refiners can make.

Meanwhile, if nothing changes our living patterns and taste for large, inefficient vehicles, demand will continue to rise. We buy more thirsty SUVs than thrifty sedans. Over the past five years, that preference has driven gasoline consumption upward an average of 1.6 % per year. Such a pace will push demand to 9.2 mm bpd in 2005 and 9.4 mm in 2006.
Most foreign refineries are unable to make gasoline that is suitable for sale in the United States. They simply do not have the equipment to turn out a product that meets our specifications. The latest elevation of our standards -- which will quickly reduce the sulphur content of our motor fuel to practically zero -- severely restricts the amount of gasoline we can import from such traditional suppliers as Venezuela.

Asia, the only place on Earth where the refining industry still expands rapidly, does not install the expensive deep-desulphurisation equipment required to meet our standards. Today only one overseas refining system, Western Europe's, can increase its output of free-free gasoline. But Europe, like the United States, will not significantly increase its capacity to produce gas.
European oil companies have neither the capability nor the incentive to expand their gasoline-making hardware. In three years or less, if US gasoline demand grows as expected, they will produce to their maximum. Then our real trouble will begin.

Let me stress an essential point. We must not pretend that a supply increase can save us. Even if public opposition and economic impediments to refinery expansion should disappear today, the oil industry could not install new equipment fast enough to prevent a shortage two or three years from now.
No company can order the major process hardware to make gasoline -- pipe stills, catalytic crackers, alkylation units, cokers and reformers -- off the shelf. It takes three years to build and install those big, costly, complex units. Add another year for design, engineering, bidding and funding. In the real world, securing operating permits would entail anywhere from a year to as long as it takes for one to lose hope.

Meanwhile, a few companies are taking risks that will soon pay handsome rewards. They are systematically acquiring any fairly priced or underpriced US refining assets that come on the market, of which there have been a number in recent years. Almost every time there is a merger, the Federal Trade Commission mandates the disposal of a refinery or two. When a wayward natural gas company has to raise cash to remain solvent, it sells refineries. A few companies with vision are always eager to buy.
Why do the consumer protection lobby and the environmental pressure groups say nothing about this real and urgent problem? They must see a gasoline shortage coming. Do they want it to occur? One of their favourite legislative goals, higher mileage standards for automobiles and light trucks, could soften the collision between gasoline demand and supply.

In one way or another, consumption is going to stop growing. The only thing we can control is how hard we hit the supply barrier. We can strike it head-on or at an angle. An early warning could allow people of moderate means to buy efficient vehicles instead of gas guzzlers in time to make a difference in their mobility and personal finances.
Whether they have to pay $ 3 per gallon or carry their ration books to the filling station, they'll thank whoever gave them timely advice.
Our leaders, who have debated energy policy for years without acknowledging any concern for a potential gasoline shortage, must now demonstrate courage and vision. They must admit that the nation's gasoline problem has no practical supply-side answer and lead us toward reducing consumption.

Michael Tusiani is chairman and CEO of Poten & Partners, which provides brokerage and consulting services to the oil, gas and maritime industries. He is a senior fellow at Columbia University's Centre for Energy, Marine Transportation and Public Policy.

Source: The Daily Camera