The Debate Concerning New Oil Refining Capacity Continues

The question of new oil refining capacity in the US continues due to issues concerning alternative fuels and higher mileage vehicles (Yahoo News). There are no winners in this situation. The refining industry will be blamed for tight refining capacity and the consumer will continue to pay high prices at the pump.

The issue that is not addressed in either of the articles are feedstocks. Will there be sufficient feedstocks for the refineries to continue operating at a profitable capacity? Based on the new refineries being built in other parts of the world it appears that feedstocks are sufficient. The real issue is future demand for gasoline, heating oil, the cost of new refining capacity, and alternative fuels.

A push from Congress and the White House for huge increases in biofuels, such as ethanol, is prompting the oil industry to scale back its plans for refinery expansions. . . . President Bush' calling for a 20 percent drop in gasoline use and the Senate now debating legislation for huge increases in ethanol production, oil companies see growing uncertainty about future gasoline demand and little need to expand refineries or build new ones.

Oil industry executives no longer believe there will be the demand for gasoline over the next decade to warrant the billions of dollars in refinery expansions — as much as 10 percent increase in new refining capacity — they anticipated as recently as a year ago.

Biofuels such as ethanol and efforts to get automakers to build more fuel-efficient cars and SUVs have been portrayed as key to countering high gasoline prices, but they are likely to do little to curb costs at the pump today, or in the years ahead as refiners reduce gasoline production. . . .

In 2006, motorists used 143 billion gallons of gasoline, of which 136 billion was produced by U.S. refineries, and the rest imported.

Drevna, the industry lobbyist, said annual demand had been expected to grow to about 161 billion gallons by 2017. But Bush's call to cut gasoline demand by 20 percent — through a combination of fuel efficiency improvements and ethanol — would reduce that demand below what U.S. refineries make today, he said.

In the 1980s, Blumenthal (Attorney General of CT) said at a recent hearing, refiners were producing at 77.6 percent of their capacity, "which allowed for easy increases in production to address shortages. In the 1990s, as the industry closed refineries, ... (that figure) rose to 91.4 percent, leaving little room for expansion to cover supply shortfalls."

A somewhat different take with similar results on the refinishing issue came from the Wall Street Journal last week.

The cost of building or expanding oil refineries is rising rapidly, contributing to delays in increasing the U.S. gasoline supply at a time of near-record prices.

The oil industry is blaming cost escalation -- driven by shortages of skilled labor and construction services, along with higher materials prices -- for a spate of pushed-back or scrapped expansion projects. . . . . The decision to rethink construction comes as the industry, flush with profits from high gasoline prices, is under fire from Congress and consumer groups in the U.S. for not doing enough to build capacity. Delays could expose the industry to additional criticism and unwanted oversight.

Years of industry underinvestment have contributed to the current rise. Refiners in past years blamed low fuel prices and poor returns, as well as environmental opposition to major expansion efforts and the cost of keeping up with fuel regulations. In the U.S., no new refinery has been built since 1976.