- The Washington Times - Sunday, July 15, 2001

HOUSTON — Consumers are taking a beating at the pump for the second straight summer, and fingers are being pointed everywhere from Wall Street to Saudi Arabia for gasoline prices that continue to hover around record levels.
Here in Texas, where the refineries that line the Houston Ship Channel have been running virtually full-throttle since March, oil men say they can fix any energy problem if Washington would just get out of the way.
On Capitol Hill, meanwhile, Democrats are scrambling to blame Big Oil.
Sen. Ron Wyden, Oregon Democrat, held a news conference in mid-June to announce he was shocked to discover that oil companies were closing their money-losing refineries back in the mid-1990s.
The White House blames the environmentalists, who oppose more production.
The environmentalists say anyone driving a gas-guzzling SUV is part of the problem.
So who's right?
They all are, in part.
The Organization of the Petroleum Exporting Countries and other oil producers have tightened supply, driving the price of a barrel of crude into the $25-and-up range — almost three times the record-low $10 a barrel producers saw in 1998.
New federal regulations requiring cleaner-burning fuels kicked in last summer, adding to costs at the pump.
Wall Street speculators, panicking on rumors of shortages, helped fuel the price spirals.
And supply interruptions have been caused by tropical storms, refinery fires and pipeline breakdowns.
Any one of those market forces, fed into a domestic refining industry that is already at capacity, can send gasoline prices higher. Feed all of it in at once, and prices go through the roof.
"If Washington allows the market to perform in a natural fashion, the refiners will respond," said Kenneth D. Miller, a senior principal with Purvin & Gertz Inc., an energy consulting firm in Houston.
Give the refiners enough turnaround time, Mr. Miller said, and not only will they address shortages but they will flood the market.
"You watch, they'll shoot themselves in the foot — they always do," he said.
The latest figures from the American Petroleum Institute, an oil industry trade group, support Mr. Miller's analysis: Refiners ramped up in June, producing 16 million barrels of crude a day.
That extra gas is taking some of the pressure off at the pump: The average national price is down to $1.47, according to the Department of Energy. The cost has fallen 24 cents since mid-May.
"A lot of these high prices are based on speculation about shortages that never occur," Mr. Miller said.
Such speculation — founded or unfounded — has real impact in the marketplace, said Dennis O'Brien, director of the Institute for Energy Economics and Policy at the University of Oklahoma.
Sure, the country has production problems, he said. After all, there hasn't been a new refinery built in the country since 1981.
But, he said, the recent runup in gasoline prices has more to do with hype and misdirection than it does with supply and demand.
"Crisis? There was no crisis. The hysteria was kicked off by Bush administration officials when they started talking crisis in mid-March," he said.
"Journalists, pundits and even oil company executives joined them, and they created a buying surge in spot and futures markets," he said.
Mr. O'Brien, a deputy assistant secretary in the Department of Energy during the Reagan administration and a former senior manager with Caltex Petroleum Corp., said the people in the White House have to be more careful about the language they use.
"Gasoline is such a big part of the economy, anytime you create a perception that there is a crisis, people will go long on the market, sucking gas out of the system. It's a very thin system. Efficient, but thin."
Everybody in the business — from OPEC, which produces about 40 percent of the world's supply, to the corner gas station — got a free ride on the backs of consumers, he said.
"There was a hell of a lot of money that passed from the consumers to the companies," he said. "And a lot of it was just unnecessary."
Refining is a big business for many oil companies.
For example, ExxonMobil Corp. reported $409 million in earnings from refining and marketing during the first three months of 2001 — up from $182 million during the comparable period last year.
Chevron Corp. reported $288 million in profit from its refining, marketing and transportation lines during the first quarter of the year — up from $64 million a year earlier.
Skeptical as he is about the "energy crisis," Mr. O'Brien said the capacity crunch at domestic refineries is real.
Even with refineries chugging along at a red-hot 95 percent to 96 percent capacity, churning out 15.7 million barrels of gasoline, heating oil, diesel and jet fuel each day, domestic production is unable to meet the country's daily consumption of 19.6 million barrels a day.
Imports cover the balance, Mr. O'Brien said — and that's why U.S. residents should be concerned.
Back from the dead
Of the three key components of the oil industry — exploration, refining and marketing — refining has long been considered the weak sister.
If exploration is all about exotic locales and strike-it-rich finds, and marketing is about bright new stores and crisp advertising campaigns, refining is about grease and sweat and lunch from a tin box.
Refineries process raw crude oil — using high heat, pressure and chemical catalysts — into gasoline, diesel fuel, jet fuel, kerosene, tar and asphalt.
The iron-and-steel plants are expensive to build and run, especially in America. Crisscrossed with miles of pressurized pipes and storage tanks brimming with flammables, they are dangerous places to work in and live around.
Labor costs are high: Refinery workers earn, on average, $24 per hour, among the highest production-worker wages in the country, according to the Department of Commerce.
Federal and state clean-air regulations add more costs, according to Bill Hickman, a spokesman for the trade group API.
With notoriously low profit margins — refineries averaged about 5 percent return in the 1980s and '90s — and high start-up costs, no company has built a new plant in this country in 20 years.
Instead, oil companies have focused resources on upgrading existing facilities — some of the huge plants were built 100 years ago — rather than hurdle the fiscal and environmental barriers to building new ones from scratch.
"Historically, it has been just a lousy business," Mr. O'Brien said. "It's always been just a really, really tough business to run profitably."
But refinery managers keep trying. Over the years, they have tweaked and tightened the process until plants that ran at 84 percent capacity in 1991 now run at 95, 96 or 97 percent capacity.
Mike Connor, an analyst with the Department of Energy, said some refineries along the Texas Gulf Coast reported they were running at 100 percent capacity earlier this summer.
So, although more than half of the nation's refineries have closed since 1981, when the number of plants in operation peaked at 324, overall production capacity has dropped only 11 percent.
That kind of productivity comes with a cost, though, said Purvin & Gertz Vice President Thomas Manning.
"You can't run full out all the time," he said. Pipes wear out. Units break down.
"With everybody running at capacity, any little problem along the line becomes magnified," he said.
Who's going to take over?
The refineries that survived the shakeout of the 1980s and '90s run lean.
Fewer employees, more contract workers. Bigger volumes often make the difference between profit and loss, so smaller refineries have been phased out. The key to profit is production, so plants are run hard.
These are round-the-clock, seven-days-a-week operations. Those pressures can have life-or-death consequences for employees who keep the plants humming.
Brenda King started working at the sprawling 2,200-acre ExxonMobil Refinery in Baytown, Texas, in 1979.
In those days, Baytown was still a company town, the company was Exxon, and a job at the plant meant a job for life. Mrs. King herself is third-generation Exxon, following in the footsteps of her father and her grandfather.
For 23 years, she has worked as a mechanical craftsman, crawling through the maze of pipes, repairing and maintaining pumps, boilers and other equipment. When she started, according to the Gulf Coast Industrial Workers Union, the company employed about 750 such craftsmen.
Over the years, though, the company turned to outside contractors to bring in cheaper, nonunion workers to handle tasks that were once entrusted solely to Exxon personnel. The mechanical work force, according to the union, now numbers about 130.
"There's no ownership in the job. Contractors come and go. Now it's time for me to retire, who's going to take over?" Mrs. King said. "We're really going to see the pancake flippers in there soon."
Things have changed at the plant, she said. "I don't want my sons working out there. That place scares me."
It's a delicate balance for plant managers. When it works, outsourcing, postponing maintenance and running at full capacity can make a refinery more profitable.
In a business where margins are tight, that extra revenue can mean the difference between making money and losing it. It can make the difference between staying open or laying off hundreds of workers.
When it doesn't work, people can get killed.
That's what happened in 1989 at the Phillips 66 plant in Pasadena, just across the Houston Ship Channel from Baytown, according to federal investigators. A contractor doing maintenance work in the facility opened the wrong valve, setting off an explosion that killed 23 workers and injured 130. That plant has since suffered two more explosions, killing three and injuring another 75.
Over the past two decades, while most major American oil companies were shedding refineries, companies like San Antonio-based Valero Energy Corp. and Connecticut-based Tosco stepped in and made the plants their primary business.
In 1993, when Exxon wanted to get rid of one of its largest refineries, the 240,000 barrel-a-day Bayway Refinery in New Jersey, Tosco took it over and turned the troubled plant around.
By decade's end, Tosco, parent company of the Circle K convenience stores, had grown into the nation's largest independent refiner.
The company's success eventually caught the attention of Phillips Petroleum Co., which announced plans in February to buy Tosco in a $7 billion deal.
The nation's largest independent now is Valero, another upstart that takes castoffs and turns them into moneymakers.
Valero, which in 1983 commissioned the last new refinery in the United States, specializes in producing the cleaner-burning gases called for under the Clean Air Act.
Companies like Valero have focused on upgrading existing plants, investing in the desulfurization units that allow the company to create premium, higher-profit products from "sour" crude — lower quality oil that sells at a discount in the international market.
The Bush administration would like to see other refiners follow the Valero model.
The White House energy plan, which has no provisions for the construction of new domestic refineries, calls for streamlining the process for expanding capacity at existing refineries.
That additional capacity will likely benefit consumers, but if Washington really wants lower prices at the pump, lawmakers will have to do something about the proliferation of special gasoline blends.
States — even cities — have their own formulas, and the blends, called "boutique gases," can't be moved easily from one area to another.
"Boutique gas is a real problem," said energy consultant Mr. Manning. "The system is mired in this tangled mess of trying to produce too many grades and too many different products for too many different markets."
California, for example, prohibits the use of methyl tertiary butyl ether, or MTBE, in its gasoline blends. The ether is common in other states but has contaminated water supplies in California.
Meanwhile, in the Midwest, gasoline blends are required to use ethanol, a corn-based product not used in any other area of the country.
House Speaker J. Dennis Hastert, an Illinois Republican, endorsed a bill last month that would reduce the number of boutique fuels used in the United States from 45 to three.
Gasoline producers are also quick to point out that gasoline taxes have skyrocketed, while the actual, inflation-adjusted price of a gallon has been steady for almost 80 years.
In June, the average taxes collected on a gallon of gasoline amounted to 42 cents, including 18.4 cents per gallon in federal taxes, according to the API industry group. In comparison, in 1981 when real pump prices reached a new high, taxes were just 28 cents per gallon.
Mr. Manning said he is always surprised by the reaction of consumers to prices at the pump.
"I paid about $1.50 a gallon to fill up the tank the other day, then I went inside and paid $1.50 for 18 ounces of this new sport drink that's supposed to be 'more like water,'" he said. "Why is it we have no problem paying these prices for watered-down soft drinks, but the price of a gallon of premium gasoline is always 'too high'?"
Staff writer Chris Baker contributed to this report.

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