The Great Refinery Shortage America needs oil. You'd rather have a beach condo

There are plenty of reasons gas costs so much, but one of them is that the United States doesn't have enough refineries. The National Petrochemicals and Refiners Association says that the last new refinery built in the United States was Marathan Ashland's Garyville, La., plant—and it was completed in 1976. According to this report, between 1999 and 2002 refining capacity in the United States rose only 3 percent, squeezing up prices since demand grew much faster than that. Who's to blame for the fact that refining supply can't keep up with our thirst for oil? Probably you. It makes sense to refine oil relatively near where it is produced or—in the case of imported oil—near its port of entry. Refineries are located all over the country. But the largest clusters, as one might expect, are near the water and population centers: the Gulf Coast, coastal California, the Great Lakes, and the Northeast. Unfortunately for refiners, about half of Americans live within 50 miles of the coast. And because of the concentration of people—and wealth—near the continental shelves, land is simply more valuable the closer you get to the water. As a result, shore dwellers have the most to lose from developments that might affect quality of life. Refiners want to be near the water, but now it's practically impossible for them to find a place to build. Refineries are high on the list of least-wanted industrial sites. This report from the California Energy Commission notes that even though 10 refineries representing 20 percent of the state's refining capacity were closed between 1985 and 1995, "it is unlikely that new refineries will be built in California." Why? Locals are concerned about the environmental impact of refineries, their contribution to smog, their traffic of giant trucks carrying hazardous materials, and the potential for devastating leaks in event of an earthquake. Natural gas, the putatively cleaner fuel of the future, suffers from a similar coastal NIMBY infrastructure problem. The most efficient way to import large quantities of natural gas is as an extremely cold liquid. But in order for consumers and businesses to use it, liquefied natural gas must be turned back into gas at expensive and large processing plants. The natural locations for such re-gas plants are along the coasts. But seaside communities don't want such developments. (The explosion of an LNG plant in Algeria last January, which resulted in 20 deaths, certainly hasn't helped.) In March, a dwindling crew of lobstermen helped convince the residents of Harpswell, Maine, to vote down a proposal to turn an old Navy fuel-storage site into a $350 million LNG plant. The jobs and $8 million a year in fees and taxes the plant would have brought weren't enough to quash concern that, in the words of the Portland Press Herald, the plant would have "interfered with fishing in Middle Bay, damaged lobster habitat, lowered property values and changed the character of Harpswell from a fishing village to an industrial community." The New York Times reported in May that local opposition had similarly scotched plans for an LNG plant in Eureka, Calif. Apparently the invisible hand of the market has decided that the best economic use of land near water—even land previously dedicated to industrial uses—is for residential development, tourism, and recreation. In San Diego, for example, Petco Park is anchoring the redevelopment of an area formerly dominated by a manufactured gas plant. In New York, the least obtrusive component of the petroleum supply chain—the neighborhood gas station—is an endangered species. Nearly 20 percent of Manhattan's gas stations have disappeared since 1999, according to Monday's New York Times. And it's getting worse. Gotham's remaining gas stations are generally located on the far East or West sides—formerly commercial and industrial areas with easy access for delivery trucks and motorists. But these are precisely the areas that savvy builders are now seeking to develop. The gas station I used to frequent, on a run-down corner at 92nd Street and First Avenue, was demolished last summer to make way for a 32-story hotel/apartment building. Concern over coastal land values is also inhibiting new discoveries of oil and gas. President Bush has pushed exploration in U.S. borders and territorial waters as a moral imperative. The need for energy independence is so compelling that it's worth drilling in the pristine Arctic National Wildlife Refuge. But Bush won't send the drills anywhere close to the clean beaches of the Florida panhandle. The Clinton administration in the late 1990s proposed selling exploration leases for some 6 million acres in the Gulf of Mexico. But in 2001, after Florida Gov. Jeb Bush protested loudly, the government reduced the potential leasable area by about 75 percent. As the Department of Interior took pains to announce, "the area lies 100+ miles from any portion of the Florida coast; for example, its northern border is more than 100 miles from Pensacola, Florida, and the eastern edge is 285 miles from the shores of Tampa Bay." The president, who prefers central Texas to the Maine coast, would probably build a refinery on Martha's Vineyard, if he could. But he knows that if he wants to win Florida again, the only oil he can let near Florida beach property is suntan lotion.

There are plenty of reasons gas costs so much, but one of them is that the United States doesn't have enough refineries. The National Petrochemicals and Refiners Association says that the last new refinery built in the United States was Marathan Ashland's Garyville, La., plant—and it was completed in 1976. According to this report, between 1999 and 2002 refining capacity in the United States rose only 3 percent, squeezing up prices since demand grew much faster than that. Who's to blame for the fact that refining supply can't keep up with our thirst for oil? Probably you.

It makes sense to refine oil relatively near where it is produced or—in the case of imported oil—near its port of entry. Refineries are located all over the country. But the largest clusters, as one might expect, are near the water and population centers: the Gulf Coast, coastal California, the Great Lakes, and the Northeast. Unfortunately for refiners, about half of Americans live within 50 miles of the coast. And because of the concentration of people—and wealth—near the continental shelves, land is simply more valuable the closer you get to the water. As a result, shore dwellers have the most to lose from developments that might affect quality of life.

Refiners want to be near the water, but now it's practically impossible for them to find a place to build. Refineries are high on the list of least-wanted industrial sites. This report from the California Energy Commission notes that even though 10 refineries representing 20 percent of the state's refining capacity were closed between 1985 and 1995, "it is unlikely that new refineries will be built in California." Why? Locals are concerned about the environmental impact of refineries, their contribution to smog, their traffic of giant trucks carrying hazardous materials, and the potential for devastating leaks in event of an earthquake.

Natural gas, the putatively cleaner fuel of the future, suffers from a similar coastal NIMBY infrastructure problem. The most efficient way to import large quantities of natural gas is as an extremely cold liquid. But in order for consumers and businesses to use it, liquefied natural gas must be turned back into gas at expensive and large processing plants.

The natural locations for such re-gas plants are along the coasts. But seaside communities don't want such developments. (The explosion of an LNG plant in Algeria last January, which resulted in 20 deaths, certainly hasn't helped.) In March, a dwindling crew of lobstermen helped convince the residents of Harpswell, Maine, to vote down a proposal to turn an old Navy fuel-storage site into a $350 million LNG plant. The jobs and $8 million a year in fees and taxes the plant would have brought weren't enough to quash concern that, in the words of the Portland Press Herald, the plant would have "interfered with fishing in Middle Bay, damaged lobster habitat, lowered property values and changed the character of Harpswell from a fishing village to an industrial community." The New York Times reported in May that local opposition had similarly scotched plans for an LNG plant in Eureka, Calif.

Apparently the invisible hand of the market has decided that the best economic use of land near water—even land previously dedicated to industrial uses—is for residential development, tourism, and recreation. In San Diego, for example, Petco Park is anchoring the redevelopment of an area formerly dominated by a manufactured gas plant. In New York, the least obtrusive component of the petroleum supply chain—the neighborhood gas station—is an endangered species. Nearly 20 percent of Manhattan's gas stations have disappeared since 1999, according to Monday's New York Times. And it's getting worse. Gotham's remaining gas stations are generally located on the far East or West sides—formerly commercial and industrial areas with easy access for delivery trucks and motorists. But these are precisely the areas that savvy builders are now seeking to develop. The gas station I used to frequent, on a run-down corner at 92nd Street and First Avenue, was demolished last summer to make way for a 32-story hotel/apartment building.

Concern over coastal land values is also inhibiting new discoveries of oil and gas. President Bush has pushed exploration in U.S. borders and territorial waters as a moral imperative. The need for energy independence is so compelling that it's worth drilling in the pristine Arctic National Wildlife Refuge. But Bush won't send the drills anywhere close to the clean beaches of the Florida panhandle. The Clinton administration in the late 1990s proposed selling exploration leases for some 6 million acres in the Gulf of Mexico. But in 2001, after Florida Gov. Jeb Bush protested loudly, the government reduced the potential leasable area by about 75 percent. As the Department of Interior took pains to announce, "the area lies 100+ miles from any portion of the Florida coast; for example, its northern border is more than 100 miles from Pensacola, Florida, and the eastern edge is 285 miles from the shores of Tampa Bay."

The president, who prefers central Texas to the Maine coast, would probably build a refinery on Martha's Vineyard, if he could. But he knows that if he wants to win Florida again, the only oil he can let near Florida beach property is suntan lotion.

It costs about $2.5 Billion to build a 200,000 bbl per day refinery in the US. That refinery would process about 70 million barrels of oil per year. The interest cost to borrow the money to build the refinery would be about $175 million per year, or about $2.50 per barrel.

Average refinery margins for have been about $2.35 per barrel over a five year period.

In other words, the profit margin on refineries is not high enough to even pay the interest on a loan to build a new one, much less return a profit to the owner.

That's why we don't have any new refineries.

Environmental issues are the secondary concern. If there were money in it, the oil companies would work hard on getting the permits.

Instead, they have sold off their existing refineries to independents for about $0.25 on the dollar. The oil companies get to deduct the loss from their income taxes, the independents get to work with a ridiculously low capital cost.

There is about 12 million barrels of spare refining capacity in the world, mostly outside of the US. That spare capacity is equal to 3/4 of the total US refining capacity.

The US has been increasingly importing finished products from this spare capacity. However, environmental restrictions requiring doubled-walled tankers, among other things, have tightened the supply of tankers available for this service, which is why freight rates have soared recently.

The high freight rates have pushed up costs for refined products, including gasoline.

New tankers are being built, which will eventually reduce this problem, but because of the Exxon Valdez oil spill, major oil companies are not willing to own tankers. Third party shippers, who are less financially capable, are the one building the tankers. If the oil companies were not so worried about an oil spill, more tankers would be built sooner.

In the mean time, the high price you're paying for gasoline is the result.

Of course, supply and demand for crude oil, the value of the US dollar, and the world wide geopolitical situation, all contribute to the underlying cost of crude oil. That sets the base value of refined products.

But US refining capacity is not really a major factor. It is just one part of the distribution system that turns crude oil into refined products and delivers them, at the appropriate specifications, to the local markets.

"Balkanization" of US gasoline specifications (Lots of individual specifications for relatively small localities) is probably more important than the amount of US refining capacity. Balkanization makes the supply chain more tortuous, no matter where the refinery is located.

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