Daily Policy Digest Tuesday, June 12, 2001

Why They're Not Building Refineries Anymore

No new refineries have been built in the U.S. in the past 25 years. And petroleum industry experts say anyone would have to be crazy to launch such an effort -- even though present refineries are running at nearly 100 percent of capacity and local gasoline shortages are beginning to crop up.

Why does the industry appear to have built its last refinery? Three reasons: refineries are not particularly profitable, environmentalists fight planning and construction every step of the way and government red-tape makes the task all but impossible.

The last refinery built in the U.S. was in Garyville, La., and it started up in 1976.

After Hampton Roads Energy Corp. proposed building a refinery near Portsmouth, Va., in the late 1970s, environmental groups and local residents fought the plan -- and it took almost nine years of battles in court and before federal and state regulators before the company canceled the project in 1984.

Industry officials estimate the cost of building a new refinery at between $2 billion and $4 billion -- at a time the industry must devote close to $20 billion over the next decade to reducing the sulfur content in gasoline and other fuels -- and approval could mean having to collect up to 800 different permits.

As if those hurdles weren't enough, the industry's long-term rate of return on capital is just 5 percent -- less than could be realized by simply buying U.S. Treasury bonds.

"I'm sure that at some point in the last 20 years someone has considered building a new refinery," says James Halloran, an energy analyst with National City Corp. "But they quickly came to their senses," he adds.

Source: Charles Oliver, "Fewer Refineries Means Less Gas; So Why Isn't the U.S. Building More?" Investor's Business Daily, June 12, 2001.

http://www.ncpa.org/pd/budget/pd061201a.html

-- Martin Thompson (mthom1927@aol.com), June 15, 2001

Answers

The "crack spread", the market price of the "Value Added" by refining petroleum, will have to rise to offset these risks and uncertainties with refinery construction. This means gasoline and diesel will have to rise in price, even if the price of crude oil remains the same.

This is one area where Bush's "facilitate production" policies DO make sense --- by construing it broadly to focus on petroleum refining and electrical grid upgrade (and Y2K bug repair); rather than oil drilling.

Soon another "red Herring" to refinery construction will arise: The remaining supply of crude oil, at prices low enough to use as fuel, won't be enough to outlast the life expectancy of a refinery. See: http://www.hubbertpeak.com and http://www.dieoff.com

-- Robert Riggs (rxr.999@worldnet.att.net), June 16, 2001.