WASHINGTON—America's unquenched thirst for gasoline is stretching the nation's refineries to their limits. Even so, no new refineries are likely to be built soon, and that helps ensure that gas prices will stay high as America becomes increasingly dependent on foreign-made gasoline.
High investment costs and low profits have discouraged the building of any new U.S. refineries since 1976. Absent new refineries, rising demand for gas will outpace American refiners' ability to make it.
U.S. and global demand for gasoline are at all-time highs. American refineries are running at more than 90 percent capacity, and at up to 96 percent in peak times. That's close to full throttle, and without precedent.
The soaring demand is highly profitable for refiners, who are squeezing out every gallon of gas they can. But their strain to meet the demand is one reason you're paying so much at the pump.
Investors fear that U.S. refineries are stretched too thin. A single accident could disrupt the strained supplies and lead to shortages. To ensure against that risk, buyers bid up the price of oil contracts, and the price of gasoline—a refined derivative of oil—rises in the process.
In virtually any other business, such tight production capacity would spark investment in new facilities. But refining isn't a typical business. Few Americans want refineries in their back yards, polluting the neighborhood and driving down home prices.
And a new, modern refinery costs more than $2.5 billion. That seems like Mount Everest to an industry that's coming out of two decades of weak profits.
"How do you make $1 million in the refining business?" one industry joke goes. "Spend $6 billion" is the punch line.
Annual refinery profits have averaged below 6 percent in the 29 years since the last new refinery opened in the United States, in Garyville, La.
Oil executives such as Jeroen van der Veer have long memories. He's the chief executive officer of Royal Dutch/Shell Group, and when he was asked about the chances for new refineries in the United States, he said: "You must have a changed view of the future before companies decide on refining investment."
That's a diplomatic way of saying that oil exploration and production should continue to yield much greater returns on investment than refining, so don't expect Shell or any other big player to build a new U.S. refinery.
"People aren't going to invest in a 5 to 7 percent rate of return when money costs you 8 percent" to borrow, said David Fleischaker, Oklahoma's energy secretary.
He should know. Oklahoma commissioned a study with an eye toward promoting a sixth refinery in the state.
"Unfortunately, bankers aren't looking for welcome mats. They're looking for high rates of return," Fleischaker said.
Oklahoma officials recently concluded that the economics to support a new refinery wasn't there. Now they're trying to help the state's existing refineries expand.
Earlier this year, the U.S. Energy Department released its annual peek 20 years into the future. One conclusion: It's "unlikely that new refineries will be built in the United States."
Instead, the agency said, existing refineries will expand to produce another 5.5 million barrels per day of gasoline. That still will fall short of demand.
Foreign-made gas will bridge the gap. Imports of finished gasoline account for about 14 percent of the gas sold in the United States today, according to the Energy Department, and will represent more than 20 percent in 2025.
Currently, the top three exporters of refined gasoline to the U.S. market are Canada, the United Kingdom and the Netherlands. Over the next 20 years, the Energy Department believes, U.S. gas imports will come increasingly from the Middle East, North Africa and the Caribbean basin.
President Bush suggests that the lack of new refineries poses a national-security threat. He proposes that new refineries be built on military bases that are being closed. The White House offers few details, however, and global trade rules prevent direct subsidies to industry.
The total refining capacity of the 149 U.S. refineries was 16.8 billion barrels a day last year, down from 17.9 billion barrels a day in 1981. In 1981, there were 324 refineries, but many closed between 1981 and 1996, when refining capacity exceeded the demand for gasoline.
"The refinery situation is a bloody disaster," said Michael Economides, an oil industry expert and professor at the University of Houston. Many American refineries are aging rust buckets, and they'll pose safety risks as metal fatigue and corrosion take their toll, he said.
Yet if Economides considers the refining sector an aging house about to collapse, the industry sees itself as a home being remodeled. Demand for gasoline has grown steadily since 1996, and U.S. refiners responded by refurbishing existing refineries. Incremental expansions added 1.4 million barrels per day of capacity from 1996 to 2003.
"They're not very much in a single view, but measured across 149 refiners in the United States it becomes fairly substantial," said Dennis O'Brien, a former industry executive who's now a consultant with the Eneradv consulting agency in Trophy Club, Texas.
One leading creeper is Valero Energy Corp., based in San Antonio. It's poised to become the nation's largest refiner if the Federal Trade Commission approves its acquisition of Premcor Inc. and its four refineries, including one in Delaware City, Del. Valero then would own 19 refineries that collectively produce about 15 percent of the nation's gas supply.
Valero's specialty is buying bankrupt refineries and upgrading them. Since 1997, spokeswoman Mary Rose Brown said, Valero has added 380,000 barrels a day of refining capacity to the American market.
"That's the equivalent of a handful of (new) refineries," Brown said.
Valero may add another 100,000 barrels a day of capacity by 2010. It plans an expansion at a refinery in St. Charles, La., which it purchased in 2003.
Incremental increases in output boost the amount of U.S.-refined gasoline, but all signs still point to a growing reliance on gas refined overseas.
"If demand growth in America continues and there is strong gasoline demand and strong diesel demand, it is unlikely we are going to be able to supply all these products," said Robert Slaughter, the president of the National Petrochemical and Refiners Association in Washington.
Domestic oil production peaked in the 1970s. Since then, the United States has become increasingly dependent on foreign oil: Fifty-six percent of the oil Americans consumed in 2003 was imported.
And dependence on foreign-made gasoline will grow as existing refineries are expanded to their maximum capacity. The Energy Department projects that in 20 years, 68 percent of the crude oil and gasoline the United States consumes will come from abroad.
"The prospect of energy independence for petroleum products is pretty much a mirage," Slaughter said. "The question is, `Will we be able to keep our reliance down?'"
The Energy Information Administration's Annual Energy Outlook report is available at: www.eia.doe.gov/oiaf/aeo/index.html.
The National Petrochemical & Refiners Association's U.S. refining-capacity report for 2004 is at: www.npradc.org/publications/statistics/2004RefiningCapacityReport.pdf.
(c) 2005, Knight Ridder/Tribune Information Services.
GRAPHIC (from KRT Graphics, 202-383-6064): 20050602 REFINERIES
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