Thursday, September 1, 2005

The Bush administration announced the other day that crude oil in the nation’s Strategic Petroleum Reserve, which contains about 700 million barrels, would be made available to oil refineries. That was in response to a decline of more than 90 percent of oil output in the Gulf of Mexico, which normally produces 1.5 million barrels per day, or more than a quarter of the nation’s total crude-oil output.

That announcement, at least temporarily, seemed to stabilize the price of oil on the New York Mercantile Exchange (NYMEX), keeping it below $70 per barrel through yesterday. But it has done little to affect NYMEX’s closing wholesale price of gasoline, which has increased by more than one third since Hurricane Katrina devastated the Gulf Coast region. Closing Wednesday at $2.65 per gallon, the September wholesale gasoline contract price, which excludes taxes and dealer profits, amounted to $111.30 per barrel, reflecting a “refinery premium” of more than $40 per barrel compared to the $70 cost of crude oil. (Each barrel contains 42 gallons.) October contracts increased more than 7 percent.

The fact that gasoline prices have soared while crude oil prices have stabilized strongly suggests that today’s bottleneck in the evolving energy crisis has less to do with the total supply of crude oil and much more to do with current refining capacity. The petroleum reserve could be emptied; but if refinery capacity is not available to process the crude into gasoline, diesel, jet fuel, heating oil and other petroleum products, then the extra crude emptied onto the market will have little impact on the ultimate price of gasoline and other fuels. Today, with nine Gulf Coast refineries closed because of Katrina, there is a massive shortage of refinery capacity. Those nine refineries represent 12 percent of U.S. refining capacity, or about 2 million barrels of oil per day. Several factors have contributed to the refinery shutdowns, including massive flooding, the loss of power and the evacuation of thousands of skilled technicians needed to operate these particularly persnickety plants. Katrina also inflicted substantial damage on major pipelines bringing crude to operating refineries and finished products to market.

U.S. refineries have become increasingly temperamental because they have been around for a very long time. In fact, we haven’t built a new refinery in more than 25 years. Yes, existing refineries have undergone significant expansion over the years as others have been shuttered, but many of them are more than 30 years old. Already operating near total capacity before Katrina, the aging refinery infrastructure left little margin for error. Katrina, needless to say, obliterated that margin and then much more. Now we are paying the price, which, appropriately enough, has reflected itself in soaring gasoline prices around the nation.

Beyond more frequent breakdowns and fires, America’s pre-Katrina refinery problem was further apparent from the rising level of refined petroleum products that have been imported in recent years. Since 1995, imported petroleum products have nearly doubled, rising from 1.6 million barrels per day to more than 3.1 million for the first half of 2005.

Unlike America’s strategic reserve, which holds only crude oil, European reserves include tens of millions of barrels of gasoline. Germany, France, Italy and Spain control most of the 52 million barrels of gasoline reserves available throughout the world. Tankers reportedly have been booked to deliver an estimated 3 million barrels of gasoline from European stockpiles. However, implying that America’s gasoline shortage was partly its own fault, Wolfgang Clement, the economics minister of Germany, signaled that releasing sufficient reserves to significantly mitigate the U.S. crisis at a time when European gas prices were at record levels might be problematic. “I must say the United States has had insufficient refining capacity for a long time,” Mr. Clement said, according to the Financial Times, “and this is presumably now impaired, so the situation is coming to a head.”

Considering the magnanimity of America’s Marshall Plan when Germans were in desperate need, one could be easily tempted to lash out at the lecturing from an ungrateful Mr. Clement. But that isn’t going to solve our long-term problem of refinery shortages. As long as America continues to consume 25 percent of the world’s oil, the least we can do is become self-sufficient in refining it.

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