Posted on 07/31/2006 10:31:55 AM PDT by Paul Ross
Time to Remove Barriers to Boosting Oil Refining Capacity
by Ben Lieberman
Posted Jul 27, 2006
The high price of oil is the main reason that the price of gasoline has nearly doubled over the last three years, but it is not the only reason. The cost of turning oil into gasoline has also risen, thanks in part to costly federal regulations on refinery operations and expansions.
Many in Congress are aware of this problem, and the House recently passed the Refinery Permit Process Schedule Act (H.R. 5254) to address it. This very modest measure would streamline refinery-related regulations and would be a useful step in expediting badly needed capacity additions. If it is serious about reducing Americans’ pain at the pump, the Senate should consider measures at least as strong as those passed by the House.
Paying the Price for Years of Anti-Refinery Policy
No new refineries have been built in the U.S. since the 1970s. Growing demand for gasoline has been met by expansions of existing refineries, but even these have come with considerable difficulty. Part of the reason for lagging refining capacity is that the sector is very heavily regulated under the Clean Air Act.
These regulations number in the dozens and affect both refinery operations and fuel specifications. According to the Federal Trade Commission, “[N]ew environmental regulations have required substantial investments in refineries, and a gallon of environmentally mandated gasoline costs more to produce than a gallon of regular gasoline.” Since the Clean Air Act’s massive 1990 rewrite, the refining sector has had to spend a much as $4 billion each year on regulatory compliance at existing refineries. These investments, which by now total nearly $50 billion, maintain existing capacity but do nothing to increase it. This regulatory burden has siphoned away substantial resources that could have otherwise gone into expansion. When expansions do occur, the regulations make them much more expensive. In addition to costs, the many procedural requirements—and in some cases litigation—can delay new capacity by months or even years.
As a result, refining capacity in the U.S. is barely adequate under ideal circumstances and is vulnerable to adverse events. This was seen last year, when Hurricane Katrina knocked out many Gulf-area offshore oil wells and adjacent onshore refineries and helped send prices skyrocketing. Even instances of unexpected downtime at individual refineries have caused noticeable price increases, showing how little margin for error exists in this tight market.
The refining industry has embarked on expansions that will help ease the burden, but that process is slow and beset by regulatory roadblocks. These expansions may not be able to keep pace with demand that is set to increase by over 1 percent annually in the years ahead, according to Energy Information Administration projections.
For now, foreign refineries are gaining market share, partially filling the domestic refining gap. Currently, 10 percent of America’s gasoline is refined overseas, but that source of supply is complicated by domestic fuel formulation regulations. The nation’s gasoline must meet complex and unique requirements, and not all foreign refiners have the ability or desire to produce these specialized blends.
The end result is that all of these unnecessarily complicated environmental regulations are adding to the upward pressure on gasoline prices.
Regulatory Relief Long Overdue
H.R. 5254 would make no substantive changes to the underlying regulatory requirements but merely expedite existing refinery regulatory processes and approvals. The bill also would make closed military bases available as future refinery sites.
The Senate Energy and Natural Resources Committee is now considering the Senate’s next step. A refinery bill similar to H.R. 5254 failed in the Senate Environment and Public Works Committee last year. This year, the Senate will most likely include refinery provisions in a larger energy package, but time is running short on the legislative calendar.
A good Senate bill should do at least as much to expedite approvals as the House bill, if not more. For example, the costly and cumbersome New Source Review program tangles refinery expansions in unnecessary red tape. Several provisions of this program should be cut back or eliminated. And the stringent deadlines of the EPA’s new smog standard are inconsistent with other Clean Air Act provisions, creating further difficulties for many refiners seeking to expand. Simple harmonization of these provisions would be helpful. Other measures, such as simplifying fuel specifications, could reduce the regulatory burdens that prevent more gasoline from being produced. These changes could be done without risking additional pollution or adversely affecting public health.
Conclusion
Whether modest or ambitious, any effort to streamline the refinery regulation would be a welcome reversal of a federal policy that has piled more and more requirements on the refining sector over the past 15 years. That policy has added to the pain consumers are experiencing at the pump, and changes could make a real difference in gasoline prices in the years ahead.
yup. same with natural gas and many other things.
If those barriers are removed, what will the oil companies use as their excuse for a shortage of refined fuelstuffs? No, a continued shortage of refinery capacity serves the oil barons well, so don't expect it to ease soon.
If the price stays high, we can ditch oil. If it is lowered, we just put the problem off like we did in the 70s. I would love to see the stupid federal laws revoked. But more than that, I would like to see a vaible alternative to the oil monopoly, and that won't happen if prices drop.
The tax-exempt, "charitable" foundations of the owners of large blocks of oil company stock: Pew, Rockefeller, Prince Bernhard, British Royals, W. Alton Jones... ALL of which are heavy donors to the environmental move-mint.
You are going to get flamed brother. Good luck.
I agree... note that even with their exploding earnings, ExxonMobil actually reduced their refining capacity this year.
That's not just because of rules with expansion and new refinery construction - they've reduced capacity everywhere but Europe...
They're just using the barriers as an excuse. They don't want them removed....
Who are these oil Barons you speak of? Please be specific.
While new refineries have not been built, expansions and upgrades to existing refineries have been continuing.
We do have a refining shortage. But the same companies you claim are at fault continue to expand refineries in the US and build new refineries in other parts of the world. They are willing and continue to spend the money, but only in places where the local governments allow them to do so.
Who is to blame for this oil monopoly?
There's this thing in a free market called competition.
While a shortage in refining capacity does serve those who own those refineries well, it makes for an appealing market for those who don't own refineries, or those who have only a tiny portion of the refinery market.
The problem is that they excessive government regulation creates a barrier to those wanting to enter the market. The government had in effect artificially limited the market to those who built refineries before the regulations were created.
The result was no new refineries for three decades, despite increasing demand during that time.
Mostly government and environmental lobbies. The companies themselves have done a great deal to buy themselves into a protected existance, however. But they just exploited a system created by the useful idiots in the environmental lobby.
According to Jack's mindset, the flaming he deserves for not understanding supply and demand probably won't take place ... the bad old "oil barons" have fixed it so that I can't afford the fuel I need to accomplish it
The executives and controlling owners of
1) Exxon-Mobil
2) BP
3) Conoco-Phillips
4) Chevron
5) Royal Dutch Shell
Time for you now to rise in their defense and assure me that they're just good capitalists doing what they do best, and that private enterprise and a free market are the best ways to level prices out.
Oh, and that I'm an idiot who doesn't understand the laws of supply and demand, despite the fact that, as we've just seen, demand is inelastic and supply is artificially constrained.
Just thought I'd save you the typing.
I called that one, didn't I?
Those companies only produce about 15% of the world's oil market. Few people understand just how large the oil industry really is.
2005 World Demand
83.99 MMBPD
http://www.eia.doe.gov/emeu/ipsr/t21.xls
ExxonMobil
2.523 MMBPD
http://ccbn.mobular.net/ccbn/7/1532/1692/
BP
4.014 MMBPD
http://www.bp.com/sectiongenericarticle.do?categoryId=9007081&contentId=7014214
ConocoPhillips
0.907 MMBPD
http://wh.conocophillips.com/about/reports/ar05/fh.htm
Chevron
1.669 MMBPD
http://media.corporate-ir.net/media_files/NYS/CVX/reports/CVX_ARSupplement_2005.pdf
Shell
3.518 MMBPD
http://www.annualreview.shell.com/(pptcw3ek5kvggr454i03ahff)/arsfs/summaryopfinrev/summarygroupres.html
And what percentage of AMERICAN consumption do those five companies represent?
Is there a shortage?
I'll see what I can find, but do you understand prices of oil are set on a world market? Transportation costs have not significantly changed since oil was at $10 a barrel.
In terms of domestic production I found 2004 numbers.
Using the information found at:
http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/crude_oil_natural_gas_reserves/current/pdf/appa.pdf
Page A-9
Total US oil production was 5,457 MBPD
213 MBPD EXXONMOBIL
827 MBPD BP
322 MBPD CONOCOPHILLIPS
493 MBPD CHEVRONTEXACO
413 MBPD SHELL
This represents 42% of American Production but only 11% of our total consumption of Petroleum Products because we import so much more that we produce. I will keep hunting for the import data and add it when I find it.
Sounds like something a democrat or a third grader would say. Are you from DU? Or just don't understand economics? Or both? Who are the oil barons? Have you met them?
As measured by the "friction" of escalating prices and correlative occasional spot shortages in the distribution at the pump...despite occasional drops in nothing hazarding national security at least so far...but nonetheless, an unwarranted regulatory infringement on free market supply...
Where was their protection in 98 when West TX Intermediate crude was selling at 8.50 a barrel and several hundred thousand people were laid off. That was the same time many small schools in West TX had to shut down and send the children to many of the larger schools that wasn't so dependent on tax revenue form oil. How about the people in the other 38 oil producing states? Do you have any idea how many oil company's there are in the United states? My last count was 3,479, not counting the 4 big majors.
Found the import data, a big pile of it.
http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/historical/2004/data/impa04d.xls
Other years and the necessary explanations can be found at:
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/company_level_imports/cli.html
This is a monthly summary of every company that imports petroleum products for the year 2004. It is a very, very long list. I deleted out all the other companies and summed the total, without separating subtotals per company. If you do to check, be sure to include all the subsidery companies, many different BP divisions and Phillips 66 is now part of ConocoPhillips.
The result is these five companies imported 1,921,123 MBBLS of petroleum products during 2004 or an average of 5,263 MBPD. Combined with the domestic production above together they produce or import 36% of the American Oil Market. A significant portion, but not enough to dictate price.
You know, I really don't get why the natural gas prices are going up too. It's not like we import natural gas, we produce our own.
We import about 16% of our daily natural gas needs, mostly in liquid form.
Have seen none here. Heard of some during the hurricane, but that is nothing unusual. When shortages start for real, refineries won't matter because it will be oil itself.
And we're continually assured that there is an abundance of crude. The shortage is in refined fuels.
Why wouldn't the price of crude effect the price of gas? when it takes 42 gallons of crude oil ( 1 barrel ) to make 19.5 gallons of gas.
Which elevates it at least two orders of magnitude above your response.
Are you from DU?
No, Iowa.
Or just don't understand economics?
What economics would that be? The economics of monopoly? Inelastic demand? Exactly what laws does the price of gasoline obey? The ones that say when demand remains constant and supply remains constant, price increases? Or the ones that say a 2 percent increase in raw materials correlates to a 20 percent increase in finished product?
Or both?
Or neither?
Who are the oil barons?
See above.
Have you met them?
No, but I've met plenty of people who swing off their nuts.
And I've never been to Spain. But I kinda like the music ...
Now that the price of oil has gone up, it makes more sense to produce more domestically, but expanding domestic production takes time, and there are strategic advantages to not fully exploiting our domestic oil reserves.
If our ability to import oil becomes a serious problem, it's going to be nice to have those reserves even if it takes a little time to ramp up production. There's a strategic advantage for the oil companies in having oil to sell (at an even higher price due to very limited supply) as well as the military advantage of having a domestic source of oil in a crisis.
While it's definitely painful to put $70 worth of gas in my truck, I'm much more nervous about the possibility of having real supply problems where we simply can't import as much oil as we need and there are shortages.
We are a very long way from being able to support ourselves on our own oil supply, and I kind of like knowing we have that oil in the ground, and if we really need it, we can get it out even though it might be expensive by normal standards.
At todays price the cost of a gallon of crude runs 1.773 a gallon.
In 2005, the total US consumption of Natural Gas was 21,869,612 Million Cubic Feet.
Natural Gas Consumption by End Use
We imported 4,326,112 Million Cubic Feet or 20% or our consumption. Of that 631,260 Million was import as LNG or a little less than 3% of our total use.
U.S. Natural Gas Imports by Country
Imports and production in non-traditional methods will need to greatly increase to meet our anticipated growing demand.
Annual Energy Outlook 2006 with Projections to 2030, Oil and Natural Gas
Oil Barons was your term, not mine.
If you want to redefine that to mean gasoline, okay.
Are you talking about refining, distribution or retail sales?
It would. But crude oil is not refined gasoline. The issue becomes clouded when we're talking apples and oranges. The thread was about increasing refinery capacity, which means increased volumes of refined fuel. That demands adequate supplies of raw materials, which we're assured are present, even though they're usuriously priced.
We've also been told repeatedly that the cost of GASOLINE is extremely volatile because of the shortage of refined fuels, not necessarily any shortage of crude. So if numerous refineries come on line, presumably that shortage of fuel will diminish.
And my question stands: what excuse will the oil gougers use to rape us then? Who will the new boogeyman be, once "the environmentalists" are pushed aside?
By the way, who are these "environmentalists?" Have you met them?
Thank You
Good info
Hiding behind a rhetorical quibble is beneath you. I don't know that there is a cabal of thieving bastards called "Gasoline Barons," so I opted for the classical designation. But you knew that.
If you want to redefine that to mean gasoline, okay.
I'm not "REdefining" anything. I made an assumption that you would understand the broader meaning of "oil baron."
Are you talking about refining, distribution or retail sales?
I'm talking about the production of refined fuels by the five companies I listed above, fuels that are then made available to the American market. I'll even go so far as to include diesel in that list.
Except for some assertions involving a supposed need for more refineries, I have never heard that. Maybe it is just that my market is totally isolated from the rest of the world, but there has been no shortage of either crude or refined product since WW II when they built pipelines to get fuel up here for the aircraft lend-lease with Russia.
The largest US oil refiner is none of those..it is Valero Energy of Texas
You do realize that 66 million gallons of gas a day have to be imported to keep up up with US demand, don't you?
Okay. Then roll them in too.
Your point is ...?
By that reasoning, shouldn't we have raised the prices 50 or 100 years ago? And whatever replacement for oil we eventually find, won't it run out someday too? Should we inflate the price from the get-go so we can look for the next replacement and the next and the next?
We've been told for years now that "refineries are operating at maximum capacity. It won't do any good to ship more crude, since the bottleneck isn't the raw material but the capacity to refine that crude into gasoline." That was the crock we were given when the first gougings started in the late 90's and have been echoed as recently as Katrina.
The retail price of gasoline rises less than the percentage increase in crude oil.
1986
Oil $15.05
Gasoline $0.927
1996
Oil $22.12 - 47% increase
Gasoline $1.231 - 33% increase
2005
Oil $56.64 - 276% increase
Gasoline $2.295 - 147% increase
June 2006
Oil $70.95 - 371% increase
Gasoline $2.963 - 219% increase
Sources
http://tonto.eia.doe.gov/dnav/pet/hist/rwtca.htm
http://data.bls.gov/PDQ/outside.jsp?survey=ap
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