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Behind high gas prices: The refinery crunch

  • Story Highlights
  • No new refineries have been built in the United States since 1976
  • Imports make up the difference between U.S. consumption and production
  • Difference grew from 17 million gallons a day in 1995 to 36 million in 2005
  • $300 billion slated for overseas refining projects over the next 20 years
  • Next Article in U.S. »
By Steve Hargreaves
CNNMoney.com
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Editor's note: This story first appeared on CNNMoney.com in April 2007.

NEW YORK (CNNMoney.com) -- It's the same story every year.

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Expansion projects at existing refineries have added the equivalent of a new refinery a year, according to the national Petrochemical and Refiners Association.

Each spring, just before the summer driving season, gasoline prices skyrocket. And every year, these four words appear in news reports nationwide as a big reason for the runup: "lack of refining capacity."

Then experts call for more refineries, politicians pledge to make the dirty behemoths easier to build, but guess what? Nothing really happens. Next year, repeat story.

So why hasn't a new refinery been built in the U.S. since 1976?

"There have been calls every year this decade for new refining capacity, yet no new projects initiated," said Geoff Sundstrom, a spokesman for AAA, the motorist organization. "Refining capacity has not kept pace with demand for gasoline."

Numbers from the government prove Sundstrom correct.

In 1995 American drivers burned about 17 million more gallons of gasoline a day than the country produced, according to the government's Energy Information Administration. The difference was made up for by imports.

By 2005, the latest figures available, the gap had widened considerably to about 36 million.

"Consumer demand just continues to grow, and we can't grow as fast at the refining level," said Charlie Drevna, executive vice president at the national Petrochemical and Refiners Association, which includes companies like Valero, ExxonMobil, Chevron, and ConocoPhillips. "But there are plenty of economic reasons why that hasn't happened."

First off, experts note, gasoline, like any commodity, is subject to big price swings. After all, in the late 1990s it was selling for less than $1 a gallon, hardly an encouraging number if you're a refinery exec looking at making a decades-long, multi-billion dollar investment.

While retail gasoline prices are currently near record highs at just below $3 a gallon, where they might be five years from now is a matter of debate.

Some experts say new investment, in both alternative energy and conventional sources, will boost supply and could cut prices in half. If a global recession hit, the drop could be even more dramatic.

Others say rampant demand, especially in the developing world, will keep prices from going anywhere but up. For an oil executive trying to decide on a refinery investment, picking who's right is a tough call.

Secondly, stringent environmental laws and effective community organizing have made it very difficult to build a new refinery in the U.S.

"Everyone is quick to say 'look at these refiners, they're driving up the price,'" said Phil Flynn Flynn, senior market analyst at Alaron Trading in Chicago. "But if I wanted to build a refinery tomorrow, I couldn't do it."

And then there's the public's newfound concern over global warming and its supposed commitment to do something about it. President Bush himself has called for a 20 percent reduction in gasoline use over the next 10 years.

"What refining executive in their right fiscal mind would say, gee, we need to add refining capacity right now," said Drevna at the refiners' association.

While refinery capacity may not be growing as fast as demand, it is growing.

For example, Drevna noted that expansion projects at the nation's existing refineries have had the effect of adding the equivalent of a brand new refinery every year. That increase came despite mandates for cleaner gasoline and diesel fuel, which take longer to make.

And the future looks even brighter.

"There is a tremendous amount of expansion," said Tom Kloza, chief oil analyst at the Oil Price Information Service, speaking of projects at existing facilities. "We will have a solid increase in North American refining capacity, but not for another two years."

Kloza said much of the expansion would come along the Gulf of Mexico and in the Midwest, an ideal spot to process heavy crude from Canada's emerging oil sand deposits.

The only place that might not see more capacity is the West Coast, said Kloza, wherethere is little refinery expansion planned, leaving the region more dependent on expensive imports.

Overseas expansion is moving even more quickly, with $300 billion slated for refining projects over the next 20 years in places like India, the Caribbean, Mexico, the Middle East, Africa, and the Asia-Pacific region.

"I think there'll be a concern that the world added too much capacity and refining will go in the dumpster again," said Kloza.

Much of the international capacity will feed surging demand in the developed world. But some will also supply the United States and Europe.

"Partly what's going on here is part of a broader trend in manufacturing, and that is the movement of it offshore," said AAA's Sundstrom. "With it go environmental issues, tax structure, legal liabilities." E-mail to a friend E-mail to a friend

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