As New Yorkers recently discovered, when crude oil prices jump, gasoline prices can jump even more. But though oil sheiks in the Middle East and President of Venezuela, Hugo Chavez, are convenient scapegoats, the real problem lies closer to home — our shortage of oil refining capacity.
Congress has discouraged the construction of new refining capacity through proposed legislation that punishes refiners when prices rise, that gives extensive and expensive permit requirements for construction of new refineries and expansion at existing sites, and that allows for tort risk. These policies need to be reversed.
A widely-respected non-profit research institute, the Energy Policy Research Foundation, published a report this month on our refinery sector titled "The Silent Disruption." It persuasively documents the difficulties of transforming barrels of oil into gasoline and heating oil.
In February 2007, pump prices fell to a recent "low" of $2.36 per gallon in New York, according to the American Automobile Association, and the price of oil was about $57 for a 42-gallon barrel. Now, refiners must pay about $67 for crude oil, a 17% increase. But the average price of gasoline in New York, $3.11 per gallon, has jumped 32%, equivalent to crude at $90. How does a rise of $10 per barrel (24 cents per gallon) become 75 cents more a gallon at the pump?
"Surprises get priced," president of EPRINC, Lucian Pugliaresi, says. He writes, "Rising gasoline demand in the U.S., combined with unscheduled refinery closings, looming strikes, limited spare replacement capacity, longer turnaround times for scheduled maintenance, and refining factors are all contributing." No new refinery has been built in America for 30 years.
For those reasons and others, refiners' inventories of gasoline are low. Inventories serve as a cushion against disruptions of supply. So does spare refining capacity, of which there is none.Inventories have declined from February highs, and now stand at 192 million barrels, equivalent to about three weeks of supply, barely above the low point of 190 million barrels that occurred just after Hurricane Katrina.
Unforeseen shutdowns have dropped the national average for refinery capacity utilization down to 88% from the usual 93%. Sinclair Oil's refinery in Wyoming is shut for 10 days of maintenance due to a power outage on May 6. It would ordinarily refine 71,500 barrels of oil a day into gasoline, diesel, and jet fuel.
On April 27, Gary Williams Energy Corp.'s 50,000 barrel a day refinery in Oklahoma closed down due to a rare surprise: lightening hit a storage tank. That refinery was already working overtime because Valero's 170,000 barrel a day refinery in McKee, Texas was closed due to a fire on February 16 and still is not running at full capacity.
Not only is supply down, demand is up. So far this year Americans have consumed 2% more gasoline, 200,000 more barrels a day, than in 2006. In early May, Americans used 9.3 million barrels of gasoline per day, of which 1.1 million were imported.
The spring season usually sees a spike in gasoline prices when refineries change their mix of output from winter to summer blends of gasoline to satisfy clean air mandates. Refiners shut down their plants and clean the tanks. This customarily results in a price rise, but the 2007 price bump is much higher than usual because of low inventories.
An obvious remedy would be to build new refineries, expand existing plants, and import more gasoline. But it's impossible to find a community that will approve a new refinery. People like to fill cars up at low prices, but they don't want a refinery close to home.
Why don't we import more gasoline? According to Mr. Pugliaresi, "Refineries abroad are expanding, but they can't expand fast enough to meet global demand. Exxon builds a refinery abroad every 3 years." There's nothing wrong with importing gasoline from abroad, but if more refineries were built here, our workers would get the jobs and our supplies would be more secure.
The good news is that as the summer fuel reaches gas stations, prices are likely to decline — barring no more surprises. But our system is stretched so thin that it continues to be vulnerable to refinery fires and hurricanes. To avoid price spikes, Americans need to take the long view and increase refinery capacity at home.
This Op-Ed was featured in The New York Sun edition of May 11, 2007.
Diana Furchtgott-Roth is a senior fellow and director of Hudson Institute's Center for Employment Policy. She is the former chief economist at the U.S. Department of Labor.