Lack of refineries adds to fuel costs

Prices increase as the number of oil refineries has been cut in half.
CHICAGO TRIBUNE
The U.S. 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 percent 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 U.S. 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 U.S. today and that means" that the usual supply and demand balancing act has been thrown off kilter, Goldstein said.
At 96 percent capacity
Refineries now operate at 96 percent of capacity, whereas the average U.S. manufacturing plant operates at 76.7 percent of capacity. Since 1981, when refineries operated at 69 percent of their capacity, the number of refineries in the United States has dropped from 324 to 153.
Goldstein noted that before the last decade, whenever prices went up, U.S. 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 United States 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 million barrels a day of capacity since 1994 by expanding and improving existing refineries in a strategy known as "capacity creep."
A long way off
And ExxonMobil Corp. Chief Executive Lee R. Raymond said in May 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 May in Dallas.
The American Petroleum Institute says a new refinery has a $1 billion cost and a 10-year time line 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 U.S. refiners was about 5.5 percent, compared with a 12.7 percent rate of return for the industrial sector of the S & amp;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 percent to 3 percent a year, he said.
If that "capacity creep" continues at a rate to adequately supply the U.S. 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.