Is there a lack of refining capacity affecting product prices in the US?
There has been considerable discussion regarding the supposed lack of refining capacity in this country and the effect this has had on the price of gasoline and distillate as demand increases. Again the uninformed media and administration officials have been the source of these unfounded rumors.
These sources cite their reasons for this interpretation as the rising demand for energy coupled with the fact that there has been no new refinery construction in over three decades. This sounds rather convincing and it is quite true. What you have not been told, however, can be represented by the following information.
In addition to lack of refinery construction in this country the following graph, taken, from the U.S. Energy Information Administration, shows that this situation has been exacerbated by the closure of half of the refineries operating since the early 1980s.
In other words, we have not built a new refinery in thirty years and we have shut down an additional one hundred and fifty. One would surely believe that we are in trouble of reaching a supply and demand upset and the information being propagated by the media and others is right on the money.
So why don’t we build new refineries? A look at the following graph might help answer this question.
This information received through the Energy Information Administration and a report by professor Ken Homa of Georgetown University clearly shows that even with a decline in refining facilities, refining capacity has actually increased from under 16 million barrels per day in the mid 1990s to over 17.5 million barrels per day in 2008, an increase of more than 10%. During this period refineries have been operating at near capacity outputs given downtime for repairs and maintenance as shown below.
The reason new refineries have not been built in recent times is due, in part, to the difficulty in obtaining permits for such facilities. Environmental restrictions make it very difficult for a refiner to build a “grassroots” facility. The time involved in obtaining permits and construction can amount to a decade. It is very difficult for a refiner to economically weigh the investment risk when these time delays in construction are so severe and environmental requirements are rapidly changing. Additionally, refineries are typically built in populated areas and most people now days are reluctant to have a large chemical processing facility near their homes.
What has been happening, and is shown in the above graphs, is that refiners have found it economically viable to expand existing facilities. The permitting is much simpler and they are able to adapt to environmental requirements as they are needed. The main reason for refinery closures over the past thirty years was the inability of old, marginal refineries to upgrade to meet the increasingly harsh environmental demands of higher product quality.
America’s refiners have done a great job of planning for future demand requirements while, at the same time, meeting the EPA standards for increased product quality. It is unfortunate that the uninformed media and the Bush/Cheney administration continually distort the data presented to the public in an effort to promote higher crude oil and product prices. Hopefully, a new administration will not be so dependent on the backing of the oil industry and the need to further the industry’s objectives at the expense of the American people.