Monday, June 02, 2008

No New Oil Refineries Since 1976

A new oil refinery has not been built in the United States since 1976. During that time, our gasoline use has increased over 25%. The nation's 149 existing refineries have been running at maximum capacity trying to meet record demand and, as a result, not only do we import oil, we actually have to import 10% of our daily gasoline from refineries overseas.

For the wealthiest, most powerful nation in the world this is a ridiculous situation that will only get worse as our insatiable demand for gasoline keeps growing and refinery capacity falls further behind in the coming years. Just a few new refineries would alleviate the problem and help keep our gas prices lower and steadier.

But getting an oil refinery built is next to impossible, hence the 30-year construction drought. There will always be environmental activists who fight any new proposed refinery, regardless of where it might be located and how environmentally safe it is. And our environmental rules give them the upper hand.

Consider the example of Arizona Clean Fuels, which has been trying to build a small refinery outside Yuma for almost 10 years. It took five years just to get air-quality permits. Now they hope to be operational in 2010, 15 years after they started the project.

The opposition to building new refineries ignores the dramatic technological improvements that have been made since an oil refinery was last constructed here in 1976. New, clean refineries emit far less pollution than older refineries, with new scrubbers and design changes that dramatically reduce sulfur and other emissions. And at the same time our ability to model and map emission characteristics and distribution lets us choose the best locations for new facilities – where they will have the least possible impact on people and the environment.

Reason Magazine

15 Comments:

At 6/03/2008 2:29 AM, Anonymous Ian Random said...

The number of oil refineries is not a good measure. It's the capacity that matters. And as they expand, they are bringing out the nimby in the neighborhood. The refiner was there first some cases. Also some refineries need to close once the local source of oil is gone as happened in southern California. It was then reopened and leased to a competitor due to political pressure. But I imagine in places without a command economy they would stay closed once their useful life is over.

 
At 6/03/2008 9:52 AM, Anonymous Diz said...

Yes,as mentioned above "number of refineries" is a poor measure on several counts.

Most of those shut down were small, inefficient, and had limited capability to extract light products. Many were in disadvantaged locations.

The trend has been to expand and increase the complexity of the refineries on the Gulf Coast and other core refining centers of waterborne crudes.

Not only do we have more nameplate refining capacity now than we did when we had a lot more refineries, that capacity is able to extract far more gasoline per barrel of crude input and handle far lower quality crudes.

It's also worth mentioning that the refining industry had abysmal returns for many decades, and existing refineries could be bought for pennies on the dollar of replacement cost. Why would anyone build a new refinery if they could buy the same capacity at 10 cents on the dollar?

Several of our largest refining companies (e.g., Valero, Tesoro) essentially built themselves from nothing in a few short years by buying refining capacity on the cheap.

 
At 6/03/2008 12:02 PM, Blogger Walt G. said...

I’m not sure the major reason for the lack of building refineries can be attributed to the environmental groups. After all, only one EPA permit to build a new refinery has been filed since 1976. Although it’s slightly dated, August 2005, here’s another perspective from the Congressional Research arm of Congress CSR report # RL33021.


“The key factor in determining whether new refinery capacity will be constructed
in the United States is the underlying economics. An oil company seeking to meet
gasoline demand in the U.S. market can do that in any of three ways. The company
can either expand existing refineries, build a new refinery, or import additional
gasoline from overseas. The economics dictate that companies choose the cheapest
alternative, given that all gasoline will sell for the same price, irrespective of source.
In 2005, it is likely that the cheapest source of gasoline is through imports. Europe
is thought to have surplus gasoline capacity as their vehicle fleet is in transition to
diesel fuel, and refineries are still largely oriented toward now excess gasoline
production. Expansion of existing refineries is likely the next cheapest source of
product. Expansion of existing refineries avoids many, or all, of the fixed costs
associated with a new refinery and allows firms to benefit from economies of scale
in the refining process. Construction of new refineries is likely the most expensive
source of new product.”

 
At 6/03/2008 1:14 PM, Blogger Marko said...

Number of applications is not a good indicator for what would be the demand for new refineries with less regulation - people are aware of the regulations and it governs behavior even without making applications. In other words, why apply when you know you will get turned down?

 
At 6/03/2008 2:40 PM, Anonymous Anonymous said...

Good quote, Walt G.

 
At 6/03/2008 4:55 PM, Anonymous diz said...

I’m not sure the major reason for the lack of building refineries can be attributed to the environmental groups.

No probably not. This is not to say the government doesn't make it harder to be in the refining business, and that at the margin addects capacity. There's little doubt that changing fuel specs and environmental requirements drive a high level of zero-return capital. At least, it's zero-return unless you count the privilege of staying open as return. Since many refineries opt to close instead of spending the compliance capital, I suppose it cold be argued the returns are higher for those who remain.

It's also worth noting that many of those refineries that were open back in the 1970's were themselves products of regulation.

There is a reason that chart peaks in 1981. That's the year the government deregulated many aspects of crude pricing, including a program that gave subsidized quotas of crude oil to small independent refineries.

The closures are more a testament to market efficiency than evidence of its lack.

 
At 6/03/2008 5:42 PM, Blogger Walt G. said...

marko,

You could be right that the large oil companies would want more refining capacity given less government regulation. I am simply expressing another viewpoint that that the issue of refinery capacity is much more complex than straightforward environmental regulation constraints.

Why is everyone assuming that large oil companies would choose to invest their profits in refineries that could possibly lower the price of gasoline to the retail customer? Is that a viable profit maximizing strategy? Should large companies be in the business of providing lower prices to consumers at the expense of profits to their stockholders? Why are large oil companies buying independent refineries and closing them if it is so difficult to build new refineries?

It’s a lot easier to sell the public on the “environmental boogieman” than it is to answer the difficult questions that I have posed. Perhaps research into how much money oil company lobbyists spend attempting to pass bills that would allow relaxed restriction on oil refinery permits would be an interesting project. Quite possibly seeing if the oil companies put their money where their mouth is would show their real agenda.

There’s nothing wrong with a company wanting to make a profit; however, the public should not be misled that high fuel prices are merely caused by environmentalists. Much more evidence is needed to establish that fact.

 
At 6/03/2008 7:31 PM, Blogger rufus said...

Oil is a complicated game. No one really wants to build a new refinery. The existing refineries are only running between 82% and 88% capacity.

The last two months we have figures for were less than 20 Million bpd product supplied. That's the first time we've had two successive months less than 20 mbpd since, I believe 93'.

 
At 6/04/2008 9:15 AM, Anonymous diz said...

Yep, demand seems to be responding.

Refining margins are low.

There have been times in the past where refining capacity constraints have contributed significantly to the street price of gasoline, but this isn't one of them.

And with oil prices being this high, and the vehicle fleet showing serious signs of migrating to higher MPG cars, it doesn't seem likely capacity that refining capacity is going to be an issue in the near future either.

I think there is a tendency on many people's part to start with the assumption there is something inherently "un-natural" about $4 gas because it used to be $1.

By "un-natural" I mean that some politician or evil oil company is to blame, not basic market forces.

Indeed, there is much government interaction with the world oil market, particularly with respect to restraining access to supply.

But most of what we are seeing now is old-fashioned micro-economic behavior -- prices rising to create demand destruction.

 
At 6/04/2008 3:06 PM, Anonymous Anonymous said...

http://www.foxnews.com/story/0,2933,363121,00.html

 
At 7/23/2008 9:52 AM, Anonymous Anonymous said...

We, in the US, have a tendency to believe that the world revolves around us. The nation was built on cheap oil. The Europeans have been paying these prices for oil for a long time (one reason that they build cars with higher MPH). The Chinese and Indian economies are growing at a tremendous rate, and they all want the same things as we do. Whether we produce more oil not will not change the price of oil/gasoline. Oil is no longer a global commodity, not national. Our only choice is to conserve and seek new energy supplies.

 
At 7/07/2009 10:31 PM, Anonymous gate valves said...

What a great article. I appreciate the info.

 
At 5/09/2010 10:48 AM, Anonymous Anonymous said...

Clearly, the reason there are no new oil refineries is because there is not enough oil left in the ground to make it profitable enough to build one.

If it were profitable, rest assured that Bush & Co would be getting it done. They've never let the NIMBY's stop them before where there was money enough involved.

 
At 5/01/2011 11:18 AM, Blogger Joe said...

Found this old thread with the erroneous statement that there is not enough oil left in the ground to justify building new refineries.
The Papa-Terra field off Brazil's coast refutes that claim. We've been running out of oil for decades now, and we keep finding vast new fields.

 
At 3/18/2012 10:05 AM, Blogger jesse green said...

Why does no news media point to the lack of new refineries as a major problem with the high gasoline prices???

 

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