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House passes measure to boost refineries; oil exec questions need

WASHINGTON—Consumer preferences for higher-mileage vehicles may slow oil and gasoline demand in coming years and lessen the urgency to build significant numbers of new refineries in the United States, Shell Oil Co. President John Hofmeister said Friday.

Hofmeister told Knight Ridder Newspapers that efforts by President Bush and Congress to provide incentives to build new refineries are welcome, but a key assumption—that the demand for gasoline will continue to increase—may be flawed. Hofmeister said the growing consumer demand for cars and trucks that get better gas mileage may change the outlook for future gasoline use.

"I would submit the likelihood of consumption patterns changing is higher, rather than lower," Hofmeister said, suggesting the change would take some of the pressure off the need to build new refineries. Shell is the U.S. arm of Royal Dutch Shell, one of the world's largest private oil companies.

On Friday, Republican leaders in the House of Representatives twisted arms to narrowly pass legislation supported by President Bush to simplify the process of expanding refineries or constructing new ones. The measure is driven by concerns that the nation's refining capacity is insufficient.

Similar legislation will be debated soon in the Senate.

No new U.S. refineries have been built since 1976. U.S. refinery capacity stood at 17.9 million barrels per day in 1981 but stands near 17.1 million barrels per day now. American refineries have been running flat out but have been unable to keep up with U.S. oil consumption, which is nearly 21 million barrels per day. Growing gasoline imports bridge the production gap.

Hurricanes Katrina and Rita damaged Gulf Coast refineries—which account for about 47 percent of the nation's refining capacity—and crippled about 15 percent of capacity. Production and supply disruptions sent gasoline prices soaring to all-time highs in September, and lawmakers scurrying to propose emergency legislation that would spur building of more refineries to ease the nation's capacity crunch.

President Bush repeated Tuesday during a news conference that America needs more refineries, but he isn't saying just how many.

"Look, the Bush administration is not going to come up with a number. I can tell you what my view is, and I'd like to have another 10 percent of capacity today," Energy Secretary Samuel Bodman told Knight Ridder Newspapers when pressed for specifics on Wednesday. "But that could come either abroad or could come here, but I would like to have something that, in a better world, would relieve some of the pressure on these facilities."

U.S. government and international agencies forecast that global oil consumption will grow from today's 83.4 million barrels a day to 120 million barrels a day by 2025. Absent new or expanded refineries, America could become even more dependent on gasoline imports in an era when developed and developing nations across the globe also need more gasoline.

But Hofmeister questions the long-term demand forecasts, pointing to the recent bout of record-high oil and gasoline prices that he feels may mark a turning point. The surge in popular SUVs came during the 1990s when oil prices were between $10 and $20. Now with oil seeming to fall within $40 to $60 a barrel for at least the next several years, consumers may demand automobiles that get better gas mileage.

"That really shifts the attention of the automotive industry to look for more fuel-efficient alternatives," Hofmeister said.

And that makes oil executives more cautious about plunking down billions on new refineries, which historically have provided lower rates of return than exploration and production of oil. It also calls into question efforts by Congress to make military bases and federal lands available to build new refineries.

Hofmeister said that even with incentives, Shell isn't planning a new U.S. refinery. Shell prefers to expand existing refineries like its joint venture with the Saudi state oil company in Port Arthur, Texas.

Asked if the emergency legislation proposed in Congress would bring about more refineries, the Shell executive answered with this question: "Does the energy legislation promote refining capacity increases predicated on current consumption patterns, or will the emergency legislation allow us to adjust refining capacity to changing consumption patterns?"

Hofmeister also called today's high oil prices "an aberration" that will be relieved as production is increased in coming years because "the industry is spending more than ever in our history to increase supply."

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20051004 REFINERIES

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