Reason Writers Around Town

In the Orange County Register, Adrian Moore says that if you want to know why Katrina has had such a drastic effect on gas prices, ask why we haven't built any new oil refineries in three decades.

Comments

[Bob]

Repeating fairy tales will not lead toward more responsible energy policy.

http://www.cato.org/research/articles/taylor-050603.html

[M1EK]

And by the way, the reluctance of oil companies to invest in refineries shows that the Peak Oilers might be on to something (as opposed to the Houston Oilers, who just suck).

[Jennifer]

M1EK--

As a devout Peak Oiler, I'd like to thank you for making that point so I wouldn't have to.

Seriously--the oil companies know their reserves are depleting; why in the world would they invest huge sums of time and money building refineries that will be worthless before too long?

[Matt]

You could ask that. Or you could ask how it came to be that our dependence on oil is so strong that we consume 1/4 of earth's output, and when a hurricane comes along it can cause everybody to panic by driving prices up to a (still low) level that most western countries would be glad to pay. Building new refineries is such a bad idea I wouldn't even know where to begin arguing against it. The answer to this problem is far more market-friendly then building new refineries. Let the price of petrol rise, and eventually even the people driving the largest SUVs will learn to conserve.

[Jennifer]

You could ask that. Or you could ask how it came to be that our dependence on oil is so strong that we consume 1/4 of earth's output,

Hell, Matt, why go for half-measures? I'd go so far as to question both.

[M1EK]

"The answer to this problem is far more market-friendly then building new refineries. Let the price of petrol rise, and eventually even the people driving the largest SUVs will learn to conserve"

We've been keeping the price of petrol (and ancillary suburban sprawl) artificially low for decades; simply allowing it to 'float' isn't going to be enough to save us from economic catastrophe. The suburbs can't be rebuilt quickly, and they can't be rebuilt cheaply.

[Evan Williams]

M1EK:

simply allowing it to 'float' isn't going to be enough to save us from economic catastrophe.

Well, then, what exactly do you propose? You're right about the suburbs, but, um, what're we supposed to do? I'd say that job numero uno is to kill all the environmentalist pukes who stand in the way of building new refineries. Then, let the oil companies make their own decisions as to whether or not new refineries are a good investment.

All of you who wag on about the oil companies not investing in new refineries, um, how can we know what they would really do if they had an unabated market, free from the shackles of NIMBY assholes? Granted, I'm sure that there's not gonna be a flood of new refineries if we killed off all the environmentalists tomorrow, but nor would there be a complete lackof new construction.

At the same time, by continuing with business as usual while oil prices double (then triple), we have made it painstakingly clear to the oil companies that we will indeed pay what they ask.

As for longterm market solutions, as long as oil is kept artificially low, there will be little market incentive to develop alt-tech. Nobody said that this transition would be EASY, but everyone knows that it would happen. The problem is, the more we fight to keep prices artificially low, the uglier it's gonna be when the transition is abruptly forced upon us. Floating prices may hurt, but the longer you postpone the inevitable, the more it's gonna hurt when it does go down.

[Warren]

Unfortunately Adrian doesn't mention how much capacity we've lost from refinery closure. According to the DOE we're in this pickle because of? wait for it; deregulation. Apparently the market couldn't sustain the capacity we had back in that convivial era known as the Carter years.

Scroll down to find this quote here.
Refining/Downstream
The United States experienced a steep decline in refining capacity between 1981 and the mid-1990s. Between 1981 and 1989, the number of U.S. refineries fell from 324 to 204, representing a loss of 3 million bbl/d in operable capacity (from 18.6 million bbl/d to 15.7 million bbl/d), while refining capacity utilization increased from 69% to 87%. Much of the decline in U.S. refining capacity resulted from the 1981 deregulation (elimination of price controls and allocations), which effectively removed the major prop from underneath many marginally profitable, often smaller, refineries.

Refinery closures have continued since 1989, bringing the total number of operable U.S. refineries to 149 in 2003. In general, refineries that have closed have been relatively small and have had less favorable economics than other refineries in their market area.

[Jennifer]

Evan--

It's not just that "new refineries can't be built;" the oil companies have also been closing existing refineries. A friend of mine used to make good money at the Amoco refinery near Yorktown, Virginia, but they closed it down about ten years ago. You can't blame that one on the greenies. If the oil companies wanted more refineries, why would they have closed the ones they already had?

[Jennifer]

Oh, but Warren already made my point for me. Bears repeating, though.

[Warren]

Just got around to reading Bob's link from the top of the thread. Good essay. Pretty-much dovetails with what I found, and delivers this punch line, "We'd love to blame big government and enviro-whackos for today's high gasoline price (we do, after all, work for the Cato Institute)".

[Mac Daddy Hoon]

The United States experienced a steep decline in refining capacity between 1981 and the mid-1990s. Between 1981 and 1989, the number of U.S. refineries fell from 324 to 204, representing a loss of 3 million bbl/d in operable capacity (from 18.6 million bbl/d to 15.7 million bbl/d), while refining capacity utilization increased from 69% to 87%. Much of the decline in U.S. refining capacity resulted from the 1981 deregulation (elimination of price controls and allocations), which effectively removed the major prop from underneath many marginally profitable, often smaller, refineries.

Do some math. 18.6 MM bpd capacity @ 69% utilization is 12.8 MM bpd output. 15.7 MM bpd capacity @ 87% utilization is 13.7 MM bpd output. So the net result of deregulation was higher output from fewer refineries. This by definition is greater efficiency, which is one of the reasons oil products have been so cheap for the past few years. So far, I see no problems.

Apparently, total refining capacity hasn't increased with demand, but I fail to see why this has anything to do with deregulation.

[Evan Williams]

Interesting. So, higher gas prices are due in large part to deregulation and discontinuation of subsidies to small, unsistainable refineries.

If the oil companies wanted more refineries, why would they have closed the ones they already had?

It's not that simple, though. According the the links people have posted, the refineries that close are the ones that are not self-sustaining/profitable sans government subsidies & price controls. Yes, Amoco may close an unprofitable refinery in Yorktown, but that doesn't mean that they don't want to build a profitable one in a better location. I'm not saying they do, I'm just saying that, given the variables, it's not out of the question. Your argument is valid, of course, but it would be watertight ONLY if all refineries were created equal. However, due to government intervention in the first place, the market is all skewed. Refineries closing down is simple market correction after the gubmint pulled out its tentacles. However, none of that means that part of the market correction won't or can't include the addition of new, efficient, profitable refineries, in place of the old, subsidized ones. Just saying, is all...

[Jennifer]

Evan--

Did you read the Cato article Bob linked to? I'm curious as to your refutations of their arguments.

[Russ D]

I know there will be some "consider the source" posts, but this is probably the most accurate analysis of the current refinery biz I've found on the web.

[Matt number 2]

President Bush recently signed a new energy bill that tries to make it easier to build new oil refineries

hmmm, Adrian mentions the bill, criticizes the greenies, but no mention of the massive government subsidation that refineries recieve. I expect more from a Reason researcher.

[fyodor]

Nobody said that this transition would be EASY

Well...some have pretty much said just that. Others are predicting a CATASTROPHE. Emulating the Buddha, I take the middle path.... 🙂

[mk]

the shackles of NIMBY assholes

I've given up on this term and replaced it with the far more accurate acronym BANANA

BANANA = "Build absolutely nothing anywhere near anybody"

[Jennifer]

I expect more from a Reason researcher.

Since Mona and Joe Bonforte aren't here, let me fill their shoes by saying that this craptastic essay would never have been published if Virginia Postrel were still here!

[R C Dean]

Well, whaddaya know. I learned something here today.

I still wonder, though, how much of the fully loaded cost of building and operating a refinery is due to regulation, and whether the subsidies cover that cost. If not, then there may be a deadweight cost imposed by government that is restricting our refinery capacity.

Seriously, though, given zoning and environmental rules, I would guess that there are big chunks of the country where you couldn't build a refinery even if you wanted to, and I would bet that no-go zone includes a lot of the coastal/wetlands near major points of entry for our oil.

[thoreau]

Regardless of whether oil supplies are plentiful or diminishing, removing obstacles to building more refineries will bring down prices if the refineries serve as a bottle-neck, and/or more refineries result in more competition.

Of course, I don't know enough to say whether the main reason for no new refineries is oil company estimates of stocks or regulations. Undoubtedly both come into play, and I simply don't know which is the bigger factor.

And obviously those regulations shouldn't be there regardless, yadda yadda yadda. But if we're talking about effects, well, we need more data. Or at least I do. Maybe somebody else knows more.

FWIW, a day or two ago I was listening to CSPAN radio and somebody was saying that oil companies still use $25/barrel as the price to determine whether a field is worth drilling. I don't know how reliable the source is, but if so then the oil companies believe that the current price situation is temporary. If they're right, well, this will all blow over. If they're wrong, they'll eventually change their analysis and drill more oilfields, but their current assumptions are slowing the response to high prices.

And before somebody accuses me of calling for regulations, I haven't said one word about that. I'm just offering food for thought.

[gaius marius]

that's a very good catch, mr bob.

why in the world would they invest huge sums of time and money building refineries that will be worthless before too long?

why shouldn't refining be subject to the same laws of trade as steel? it's cheaper to refine oil overseas. that we don't refine more of it there is more a function of government regulatory subsidy of the oil infrastructure under the rubric of national security.

but, ms jennifer, that doesn't mean no one is building refining capacity. capacity expands annually with investment.

[Don Mynack]

Most of it is profitability. Cheap oil doesn't make refineries a profitable investment - the subsidies basically ARE the profit. However, as cheap oil becomes depleted (which is what "peak oil" is all about, access to cheap, easily obtainable oil) then the refining business becomes a better investment. Environmental regulations would need to be relaxed or waved to build new facilities. I wouldn't count on the subsidies going away, however.

Daniel Yergin had a good editorial on this a couple of weeks ago in the WSJ. It may or may not have been posted in this forum somewhere.

[gaius marius]

the oil companies believe that the current price situation is temporary.

it's perhaps not that so much, mr thoreau, as building a buffer into their business plan that can account for unexpectedly depressed prices without rendering them unprofitable. the gold industry still uses something like $250/oz as a similar benchmark, even though gold has been at $400+ for more than a year.

[thoreau]

gaius-

To be fair, I understand that refined oil products are less dense than crude oil, and this affects transportation costs and favors refining closer to the point of sale.

Of course, that's only one variable. I don't know how the other variables play out. You're the chemical engineer here.

[gaius marius]

However, as cheap oil becomes depleted (which is what "peak oil" is all about, access to cheap, easily obtainable oil) then the refining business becomes a better investment.

further, it becomes a necessary investment, as different crudes require different refining processes (within margins of course). a mass switch to heavier, dirtier crudes with lower octane outputs will necessitate more investment in refining -- which will be paid for in higher prices.

there is a lot to peak oil, regardless of what many seem to want to believe -- the easy sources are clearly ending, and higher extraction and refining costs (especially in the transition) will be part of the consequences.

[gaius marius]

You're the chemical engineer here.

i'm flattered that you remember, mr thoreau. 🙂

crude is far more transportable on many levels, some having to do with volatility. there's no doubt that local refining is optimal in a cost-equivalent situation.

but we should remember that light product is shipped from the gulf to the northeast in massive quantities -- it isn't as if the stuff is unmovable.

and, while the cost of refining in the united states has actually declined in real terms, it hasn't declined as much as it has in the third world.

in any case, i'm not saying that all our product can, will or should be refined in malaysia. but a greater proportion could be than is.

[Sports Dude]

ask why we haven't built any new oil refineries in three decades.

We have been too busy building professional sports stadiums and arenas!

In fact, why hasn't the oil industry tapped in to the pro stadiums industry to get the know how to force through new projects? They seem to get the NIMBY people kicked out via emminent domain!

[JDM]

"And by the way, the reluctance of oil companies to invest in refineries shows that the Peak Oilers might be on to something (as opposed to the Houston Oilers, who just suck)."

How is that? They build capacity to meet demand. Whether or not they are running out of oil, they won't build more high-capital low-margin capacity unless they believe there is going to be an expansion in gasoline usage. It really can't be said to have anything to do with peak oil anymore than it can be said to be caused by the belief that aliens will steal any new refineries they build. It's called "affirming the consequent."

Taking into account that European suppliers sell gasoline cheaply due to deisel subsidies causing an oversupply of gasoline in Europe, and the fact that more capacity has been, and is being added, and there really is no support here at all for Peak Oil.

[joe]

Why haven't we built any refineries in 30 years? I dunno, but I think it's related to why people are being told not to smoke around the floodwater in New Orleans.

[Jennifer]

Joe--

Huh?

[zach]

jennifer, joe is pointing out the fact that a hurricane resulted in oil spills in new orleans, as if that is a reason not to build more and better oil refineries elsewhere.

i read an interesting column in the wall street journal this morning (i forget by whom) saying basically the same thing - that alot of this trouble could be avoided if we allowed more oil refineries to be built in the U.S. - but focusing on the anti-"price gouging" laws around the country. it points out very simply that laws that impose caps on the cost of a resource in a crisis keep the market from compensating adequately to reduced supply with equal demand, thereby depleting resources and causing a host of other problems for the consumer. also, they penalize companies which had the foresight to stock up on the resource before the disaster. it was short but interesting.

[Dave W.]

but focusing on the anti-"price gouging" laws around the country. it points out very simply that laws that impose caps on the cost of a resource in a crisis keep the market from compensating adequately to reduced supply with equal demand, thereby depleting resources and causing a host of other problems for the consumer. also, they penalize companies which had the foresight to stock up on the resource before the disaster.

Which is nice, but there are like 5 oil companies and they do not act independently of each other. You can't regulate a market if a market doesn't exist in the first place.

Now if we broke up the oil companies into smaller pieces that followed independent supply strategies, then deregulation would start making sense. But, first things first.

I've been through enuf rolling blackouts to know what I am talking about here!

[zach]

gas prices seem to fluctuate often enough with the existing number of companies.

[zach]

to clarify, deregulation of some kind is not what the WSJ article was proposing. there are only 12 or so states with anti-oil-price-gouging laws (yeesh) in existence today, most of which impose caps on the price of oil in a crisis such as the one the country's facing now. mostly the piece was an admonition against politicians jumping on the price-cap bandwagon to get cheap votes, since such action would only end up hurting consumers.

[Dave W.]

However, due to government intervention in the first place, the market is all skewed.

If refineries aren't regulated by government, won't they cause too much pollution?

This seems like a pretty valid concern, even for a libertarian. We do share the air and water and all that, so we have a commons, like it or not, and a pretty important one at that. The tragedy of the commons isn't just some exotic 21st century idear, ya know.

I understand that gov't regulations are often counterproductive. However, some of these posts make it seem like the concept of regulating refineries (for environmental purposes, I assume) is a bad thing generally.

Shouldn't we be trying to talk about how to fix the environmental regulations rather than just trashin'em? Where's that Reason science writer dude -- has he written about refinery pollution, anyone know?

[Dave W.]

Zach,

Parallel price fluctautions are evidence of collusion, not of a functioning market. A cartell does not freeze prices, it controls them on an ongoing basis, in view of the totality of relevant circumstances.