Earlier this year, when the MSM was screaming nasty things about the Arab nations because oil prices were so high, the Kingdom of Saudi Arabia sent Crown Prince Abdallah Bin Abdul-Aziz to meet with President Bush, a task both honoring and annoying the nobleman. Prince Abdallah, who ascended to the Saudi throne when King Fahd passed away in August, did not hesitate to remind President Bush that the problem of U.S. prices was not due nearly so much to the supply of oil, as the need for new refineries to produce the fuels in useful condition.
The last refinery built in the United States was in Louisiana in 1976. The estimated demand in 2003 exceeded Refinery Production by approximately 4,000 barrels a day (pg 4). The numbers are not yet known for 2005, but are expected to continue on a deficit trend.
Worse, the estimated cost of a new refinery is far beyond acceptable ranges most companies have available for capital expenditures. A single new refinery capable of producing 100,000 barrels of EDC refined product in a day would cost between 5.5 Billion and 6.5 Billion dollars to build (pg 15), and would require not only a six-to-ten year delay while the EPA conducted environmental impact studies and approved the proposed refining processes, but also tax abatements for property tax from the state and county governments to even make the project feasible. In addition, the provisions of the Clean Air Act of 1990 are so worded, that even if they approved the construction, if the EPA later believed that the new refinery was increasing ozone or nitrogen content in the air, the refinery would be shut down. There is no company willing to invest the money or effort to build a new refinery under such conditions.
The plans for most refineries, rather than trying to build new “grassroots” facilities, is to expand capacity at existing facilities (pg 14). The problems with that approach include the fact that Capacity and Utilization of U.S. Refineries has risen from 89.2% in 1949, to 92.8% in 2004. That is, half a century of innovation has only improved C&U by 3.6%, and as upper limits are approached, the task becomes more difficult.
Another consideration had been to bring refined fuel in from other countries, but other nations use different standards for acceptable refinement. According to the Hart International Fuel Quality Center, for example, in 2000 the United States limited Gasoline Sulfur Specifications (GSS) to no more than 120 ppm (parts per million). Europe held GSS to 150 ppm, while Brazil allowed 1000 ppm. In 2004, the United States had reduced allowed GSS to 30 ppm, while Europe still allowed 50 ppm, and Brazil still allowed 400 ppm. The difference in GSS levels allowed is an example of why refined fuel from other countries may not be a feasible solution for U.S. demand.
Another problem is the nature of the crude oil itself. Oil is not the same everywhere; West Texas Intermediate is much different from Light or Heavy Arab Crude, and both are different from Nigerian Bonny Light. Without going too far into geology and chemistry, when the oil is refined, different types of crude produce different amounts of the various products. Most important is the presence of “heavy bottoms”, material in crude oil that is all but impossible to refine and does not even burn at less than a thousand degrees Fahrenheit. As a simple comparison, Arab Heavy averages 27.2% “heavy bottom” material, making more than a quarter of every barrel effectively worthless. Bonny Light, on the other hand, has only an average of 3.4% “heavy bottom” material. (pg 130) In plain English, this means that the refinery is often built and equipped for a certain type of crude oil to process, and if the oil coming in is changed, the refinery needs to be refitted with the necessary equipment and the staff trained for the different type of oil.
Liberals have attacked “big oil” for all manner of supposed connivance against the average American, but a look at the historical record shows that oil prices have effectively dropped when compared in real dollars with CPI increases for non-food and non-energy expenses. The American Petroleum Institute observed that smaller companies were simply unable to survive in the “cheap oil” days from 1980 to 1998; the reason the industry depends on the big companies, is because only the big companies managed to survive the lean years. Certainly, there was no effort to protect oil companies when they lost money, the way there has been for airlines and banks.
So, in a nutshell, the United States had 324 operating refineries in 1981; in 2005 there were only 148, not deducting refineries shut down by storms this year or for required maintenance. The United States remains the largest refiner of oil, producing 17.1 million barrels or distilled oil per calendar day. However, other nations have begun to close the gap, including India (446 thousand barrels a day in 1970, now 2.25 million barrels a day), Brazil (502 thousands barrels a day in 1970, now 1.8 million barrels a day), and Taiwan (119 thousand barrels a day in 1970, now 1.2 million barrels a day), but the collective effect of these improved refining levels will increase demand for oil countries outside the United States, while American supply will be unable to meet demand, unless the strategic need of new refinery capacity is addressed as a very real national crisis. When Hurricanes Katrina and Rita struck the Gulf Coast, refining capacity in the Gulf Coast (where most US vehicle fuel is processed) dropped 28%, and retail gas prices shot above $3.00 a gallon.
The need for new refineries and capacity is already at emergency level. And the expedient demand that private companies alone absorb the cost and difficulty not only ignores the fact that construction costs are well beyond feasible capital expenditure, but also that ecological and bureaucratic opposition has prevented diligent efforts for three decades to address the need. Local and state governments have lied to themselves for a generation that the refining need could simply be pushed off onto somewhere else, but they would still get their gas and oil. Also, the oil industry is already coping with the conflicting weights of short-term and long-term demands, competing investment requirements and responsibilities to shareholders’ return on investment, price and availability of feedstock, alternative or substitute fuels, present and future regulations and restrictions, and of course the limits of safety and capacity production; they have pretty much done all they can do, and it is time for the federal government to act in defense of this strategic resource.