By Doug Abrahms

08-03-04

Drivers should brace themselves for the kind of price swings at the pump that Californians are seeing, experts say, in large part because there are fewer US refineries trying to keep up with increasing demand for gasoline. Energy companies have closed more than half of their US refineries since 1981. Oil companies say they closed unprofitable refineries and environmental regulations have made it difficult to build new ones.
But consumer groups and some lawmakers question whether energy companies have closed refineries to stifle competition and increase profit. The result of fewer refineries turning crude oil into gasoline is that any unplanned maintenance, pipeline problem or even routine seasonal changes in gasoline blends can send prices reeling.

For example:
-- California gas prices have risen 40 cents since Jan. 1 to more than $ 2 a gallon as refineries cut outflow to switch from winter to summer blends.
-- A gasoline pipeline rupture from a refinery caused Phoenix motorists to wait in lines last summer.
-- Gas prices shot up 50 cents a gallon in Chicago in 2000 because of refinery problems.
"The smallest problem seems to have a dramatic impact," said Rayola Dougher of the American Petroleum Institute, which represents oil companies. "We have a system really straining. We need more (refining) capacity."

But few short-term solutions are on the horizon. Most energy companies have no plans to build US refineries and Shell Oil plans to close one in Bakersfield, California, this summer.
The energy bill stalled in Congress offers a few limited incentives to add refinery capacity. An Energy Department spokesman acknowledged the problem but said the agency has no concrete proposals to address it.

David Hackett, an energy consultant for the California Energy Commission, said states could remove regulatory barriers to build refineries. California in particular could offer loan guarantees or other financial incentives for companies to increase storage capacity of gasoline to reduce shortages, he said.
"But there aren't any near-term solutions," Hackett said. "Consumer demand has outstripped refinery capacity."

High prices for crude oil, which is refined into gasoline, has helped push up gas prices about 20 cents a gallon nationwide this year, according to the US Energy Information Administration. Regular gas averaged $ 1.72 nationwide, closing in on a new high for the last 12 months.
But prices spiked even higher in the West as refiners cut back to switch to producing summer blends of gasoline designed to burn more cleanly in warmer weather. Janet Rambeau has been trying to shop around for the best deal at the pump after prices soared near her Palm Springs, California home.
"I want to know especially why it's so expensive here when I saw on CNN that the average price was $ 1.70 a gallon or $ 1.60 a gallon," Rambeau said.

California's tight refinery capacity and strict environmental regulations regularly make its prices among the highest in the nation. But price spikes are also expected to appear in New York and Connecticut this spring when refiners in those states must begin adding ethanol to their gas mix to replace MTBE, an additive that causes water pollution. Prices could jump by 30 cents a gallon because fewer refineries can make this blend of gasoline and supply bottlenecks could occur, according to the Energy Information Administration.
Tom Kloza, an oil analyst at Oil Price Information Service that monitors the industry, expects another price spike nationwide before Labour Day, as gas demand grows when motorists take their summer vacations.
"The third quarter is going to be wild," Kloza said. "The problem with gas isn't a problem with crude. It's a problem of domestic refining capability."

Oil companies cut back refineries in the late 1990s and have enjoyed higher profits and little state or federal oversight, said Charles Langley of the Utility Consumers Action Network in San Diego. The situation is similar to the electricity shortage that hit the West in 2001, when a generator went out of service for maintenance and prices soared.
"It's as if they tore a page from the playbook of the electricity price gougers," Langley said. "I think the real problem is we have the situation of where the industry is able to take advantage of tight supply and drive up the price."

Sen. Ron Wyden, D-Oregon, last February asked the Federal Trade Commission to investigate Shell Oil's decision to close a Bakersfield, California refinery in September and determine whether it will cause further anti-competitive problems on the West Coast.
"To us, what makes this smell is Shell... has apparently made no effort to find a buyer," Wyden said. "We have evidence that companies have deliberately curtailed refining capacity (in the 1990s)... as a strategy for boosting profits."
Shell will close the plant because it was unprofitable and didn't receive enough oil from the surrounding area to keep operating, said James Frazier, a company spokesman. Shell will increase production at its other plants but makes business decisions based on what's good for the company and not how it affects the price of gasoline, he said. The industry blames environmental regulations and new clean air rules for making it too difficult and costly to upgrade old refineries or build new ones.

This year, the Environmental Protection Agency required companies to lower the sulphur content in gasoline, and some plants decided not to make the necessary investment and closed, said Gene Edwards, a senior vice president at Valero, a large refiner. States like New York will start adding ethanol to their gas, which not all refineries can produce and could require substantial upgrades, he said. The United States will be forced to rely on more gasoline imports, he said.
"We're running 100 % of what's available," Edwards said. "There used to be more extra capacity in the system but that's gone now."

Source: Gannett News Service