kenimpzoom
Rear Admiral
- Joined
- Jul 13, 2002
- Messages
- 4,807
I hear a lot of people spreading misinformation about why gas prices are so high. This story tells the truth.<br /><br /> http://www.chron.com/cs/CDA/ssistory.mpl/business/energy/2470791 <br /><br />Limited refinery expansion means higher gas prices<br />By NELSON ANTOSH<br />Copyright 2004 Houston Chronicle<br /> <br /><br />Gasoline may cost 25 cents a gallon more during the summer than now, in part because the demand has outstripped what domestic plants can refine, but motorists shouldn't look for relief in the form of a building boom anytime soon.<br /><br />Refiners admit the tight market has been good for bottom lines, but they have a long list of reasons not to start major plant expansions.<br /><br />With record pump prices now and expectations of a summer spike, oil and refining companies are making hefty profits, for a second year.<br /><br />Bill Greehey, chief executive of the nation's largest independent refiner, for years has predicted "big bucks" for his industry and said at a conference last week that the fundamental change he has been expecting has arrived. San Antonio-based Valero Energy, which has grown into the top spot through a string of acquisitions, is predicting an "incredible" 2004, with record earnings.<br /><br />Others in the business are similarly optimistic. Chief Executive Thomas O'Malley of Premcor in Old Greenwich, Conn., has talked in a trade publication about a protracted "golden age" of strong profits, while Marathon Oil CEO Clarence Cazalot is "very bullish" on refining.<br /><br />Normally, high profits inspire higher production capacity. But between now and year-end 2006, refiners say they will be spending billions of dollars on things other than expansion.<br /><br />Industry officials all say the cost of meeting clean-fuel rules diverts money that could be used for new construction. To make matters worse, the methods used to take out sulfur to meet the specifications also reduce the amount of gasoline that can be made from a barrel of crude.<br /><br />Stagnant capacity<br />This burgeoning gap between a flat domestic supply and a growing demand from big gas-hungry vehicles has been filled by imported fuel. But even this source has been crimped by environmental rules that took effect Jan. 1 preventing some of this imported fuel from being sold here. <br /><br />Although some companies are expanding plants, the barrel amounts involved are relatively small compared with the industry total. And there are some small refineries that may close rather than comply with the new rules.<br /><br />No new refinery has been put up in the United States since 1976, and building one is out of the question, in Greehey's view.<br /><br />"Even if you could get the necessary permits, which I don't think you could, it's just too expensive to build a new grass-roots refinery anymore," he said. Instead, his company has been buying refineries at a fraction of the cost of building.<br /><br />Critics say the market is dominated by big companies that have grabbed a dominant share of the market through acquisitions and don't want to jeopardize those profits by adding capacity.<br /><br />While noting that there are not-in-my-back-yard and clean-air considerations behind the lack of refinery construction, "there is tremendous financial incentive for them to have very tight capacity," said Tyson Slocum, energy research director for the consumer group Public Citizen in Washington, D.C.<br /><br />"When you have that incentive, it is no wonder these companies are in no hurry to expand," said Slocum.<br /><br />The organization has calculated that the top 10 refiners controlled more than 78 percent of the market in 2003, compared with less than 56 percent 10 years earlier.<br /><br />High pump prices aren't necessarily something refiners like to see, said Valero spokeswoman Mary Rose Brown.<br /><br />High pump prices and high margins aren't the same thing. Sometimes rising gasoline revenues can't keep up with even quicker jumps in crude costs.<br /><br />As an example of how margins can change in unexpected ways, during the first 17 days of March, the average U.S. refining margin declined by almost 30 percent, according to a research report by Friedman, Billings, Ramsey & Co.<br /><br />High prices can actually hurt oil companies by reducing demand and slowing the economy, said Brown.<br /><br />But nationwide pump prices are likely to reach $2 per gallon during the peak driving season this summer, predicts analyst Phil Flynn of Alaron Trading Corp. The current average of around $1.74 still isn't enough to crimp demand.<br /><br />Demand is stronger than anybody predicted, according to Flynn. The stronger economy is a part of it, along with the trend of SUVs replacing older, higher-miles-per-gallon vehicles.<br /><br />Regulation tangle<br />Any question about expanding existing refineries leads to a discussion of the new source review process, which is an environmental issue of intense interest to both refiners and environmentalists. <br /><br />At issue are a complex set of rules wherein a significant expansion project can trigger a requirement that the plant owner also make costly investments to upgrade the pollution controls in older parts of the plant.<br /><br />There was some industrywide increase in capacity in 2002, but it has been virtually flat since then, says John Felmy, chief economist for the American Petroleum Institute.<br /><br />The new source review regulations paralyzed expansion, he said, plus the improved profits still aren't all that good when viewed in the bigger context.<br /><br />The easy expansions have already been done, said Jacques Rousseau, energy analyst for Friedman, Billings, Ramsey & Co. There is new growth, he says, but it is happening overseas.<br /><br />Spending money on mandates that don't add to profits is nothing new, said the analyst in a report, but in recent years has actually worked to the advantage of refiners by limiting growth.<br /><br />The new source review rules go back to the 1970s but were reinterpreted by the Clinton administration, which publicly announced it was going after the industry. Many were hammered with big fines for work done years earlier.<br /><br />While the Bush administration is attempting to undo the changes of the Clinton years, the combination of litigation to block them and conflicting state regulations creates uncertainty for those contemplating an expansion.<br /><br />In the meantime the refiners are spending more than expected to comply with federal regulations.<br /><br />The estimates for clean-fuel expenditures involving independent refiners have almost doubled from estimates made in 2002, said Rousseau. Valero plans to spend $1.5 billion, for example, and the Marathon Ashland joint venture, which is 62 percent owned by Houston-based Marathon, will spend about $900 million.<br /><br />The U.S. refining industry could spend as much as $20 billion on meeting all types of regulations this decade, predicts Bob Slaughter, president of the National Petrochemical and Refiners Association. Depending upon size, this could be enough to build a half dozen refineries.<br /><br />Imports and closures<br />All this means that for the foreseeable future we live in a country that is increasingly becoming a gasoline importer. <br /><br />The United States needs 1 million barrels per day of gasoline imports during the summer just to keep the cars and trucks rolling, Valero calculates. Over the course of a year, imports amount to about 10 percent.<br /><br />But even that source of supply has its environmental problems. Regulations that went into effect on Jan. 1 are keeping the equivalent of 150,000 barrels per day out of the country. Gasoline imports for the year to date are down about 6 percent, the equivalent of about 50,000 barrels per day.<br /><br />Much of the 150,000 barrels has been coming from suppliers such as Russia, Turkey and South America, where refineries aren't set up to produce the lower-sulfur fuel that is now required.<br /><br />There are also still refineries with questionable futures.<br /><br />A few have been closed by owners that don't want to make the clean-fuels capital investment. As the 2006 deadline approaches, there will be more closures, primarily of small plants, Greehey predicts.<br /><br />Shell recently announced plans to close a 70,000-barrel-per-day refinery in California on Oct. 1, but for different reasons, a move that some officials in the gas-short state questioned.<br /><br />The refinery in Bakersfield was built 70 years ago on a oil field that is playing out, said spokesman Cameron Smyth in Los Angeles. Bakersfield is a landlocked town in a valley, he said, which means that bringing in crude oil would involve crossing several mountain ranges. If another company were to buy the plant, it would face the same problems.<br /><br />But for other smaller refineries, this higher profit margin environment may be offering some relief. The business is looking considerably better than in late 2002 when up to 20 refineries faced the bleak prospect of either finding a buyer or being shut down.<br /><br />Since then, pretty much all have found buyers with exception of the 100,000-barrel-per-day Crown Central Petroleum refinery in Pasadena, which has sparked some rumors that it might be shut. However, a company spokesman in Baltimore said the goal remains selling it as a running plant.<br /><br />Recent speculation that a half dozen smaller refiners in the Midwest might close has its doubters, according to oil analyst Tom Kloza of the Oil Price Information Service. The business looks good enough that substantial Wall Street money is ready to come into the business, he reasons.<br /><br />Some areas are more attractive to refiners. The Marathon Ashland Petroleum venture, the nation's fifth-largest refining operation, likes the Midwest. Even given the opportunity, "you won't see us on the East Coast or the West Coast, I assure you," said Marathon head Cazalot during a conference call with analysts.<br /><br />The Marathon Ashland venture owns the only refinery in Michigan, in Detroit, where it is boosting capacity from the current 74,000 barrels per day to about 100,000 barrels. It also recently completed a much smaller expansion at a plant in Louisiana.<br /><br />Probably the biggest expansion anywhere is taking place at Premcor's Port Arthur refinery, which is going from 250,000 barrels per day to 325,000. Its CEO has said he would like to see it ultimately expand to 400,000 barrels per day, which is near the glory days two name changes ago when it was the Texaco refinery
Of course, these guys have been known to be wrong, just like last year.