Refining the Battle Against High Gas Prices

Everyone knows that <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />America imports more than half of the oil it uses, but few are aware that the nation also imports some of its gasoline.  As a consequence of inadequate domestic refining capacity, approximately 10 percent of America's finished gasoline (and refined gasoline components) is shipped in from Canada, Venezuela, the Caribbean, and Europe.  While the need for “energy independence” is often overblown, in this case the growing reliance on foreign refineries does not bode well for the future price of gasoline.<?xml:namespace prefix = u1 /> <?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />

Despite steadily increasing demand for gasoline and diesel fuel in the US, the last domestic refinery was built in 1976.  One reason is the substantial regulatory barriers and costs involved in constructing a new plant and operating it in compliance with the applicable Clean Air Act (CAA) regulations.  With regard to the latter, the CAA places a double burden on refiners—strict motor fuel requirements that make gasoline more difficult to produce, and a slew of tough restrictions on refinery emissions.  Even with today's high gas prices and strong industry margins, no serious proposal for a new refinery is on the drawing board, and few expect one any time soon.

Until recently, most of the slack has been taken up by capacity expansions at existing refineries.  But this has not been easy either, and in fact was made more difficult since 1999 as a result of a Clinton administration crackdown on numerous refiners, claiming violations of the CAA.

Refinery utilization rates hover around 95 percent, very high for any industry.  This is a sign that expansions have barely kept up with rising demand.  And even that may no longer be true.  “Refinery capacity has not expanded significantly since last summer,” according to a recent report by the Department of Energy's Energy Information Administration (EIA).

Enter foreign refiners, who have been serving American markets for years but who now play a vital and growing role providing Americans with the additional gasoline that domestic refineries cannot.  These refiners have the advantage of operating free of the CAA's requirements, though their products must meet all US specifications.  As much as 25 percent of the Northeast's gasoline comes from abroad, making it the region most dependent on foreign supplies.

But, just as America is placing increased reliance on non-US refiners, some of those refiners are no longer up to the task.  The reason is that federal gasoline requirements continue to get more complicated.  In addition to the regulations already in place, the EPA is almost constantly phasing in new ones, such as the low sulfur requirements for motor fuels that took effect at the beginning of the year.  As the US goes further and further down the path of complex, mandate-laden gasoline recipes, fewer offshore refiners are willing to make the investments necessary to produce these specialized blends.  By one estimate reported in The Houston Chronicle, the new sulfur standards have taken as much as 150,000 barrels a day off the market, a small fraction of the 9 million barrels America uses each day but enough to make a difference when the market is already tight.

Looking ahead to summer, EIA forecasts a slight increase in imports that will only partially satisfy sharply higher demand, as compared to last summer.  EIA concludes that “incremental foreign supplies may be hard to come by and are expected to be costly.”  This could contribute to higher summertime prices, particularly in the Northeast.

Looking even further out, EIA forecasts that demand for petroleum products will increase by 1.6 percent annually for the next 25 years.  This fuel will have to be refined somewhere, but where and how is hard to fathom given the current trends.