Lack of new refineries also factor in high gas prices

May 30, 2004 02:00 AM

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.
"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.

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.
"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.

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.
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.

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."
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.

The American Petroleum Institute says a new refinery has a $ 1 bn price tag and a 10-year timeline for completion.
"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."

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.
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.

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.
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.

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.
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.

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.
"We will continue to see shutdowns of small inefficient refineries that can't compete," said Joanne Shore, senior analyst with the Energy Information Administration.

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.
"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."

Source: Chicago Tribune
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