Pining over Defining Refining in a Doomed Generation of Regulations:
Refining Capacity is One Tricky Business!!! (11/04)

The following column by AGI/AIPG Geoscience & Public Policy Intern Bridget Martin is reprinted from the November 2004 issue of The Professional Geologist, a publication of the American Institute of Professional Geologists . It is reprinted with permission.

Gasoline pump prices have risen to record highs this year. Consumers have been hit hard by the trend and have called on Congress to take action to lower gas prices. However, major factors that determine pump prices, such as the cost of crude oil, are not under the direct control of Congress. Oil industry lobbyists have been pressing Congress to take action on one issue they claim Congress could have some influence over: the capacity of the United States to refine crude oil. Even if the cost of crude oil falls and other factors affecting gas prices improve, the U.S. cannot increase its ability to refine crude oil into gas that can fuel the nation’s cars, trucks, jets, and heaters, unless new refineries are built or existing ones are expanded. Industry representatives have been asking Congress to help increase the economic viability of the refining industry by changing and simplifying environmental regulations. Industry critics, however, argue that energy companies actually benefit from tight refinery capacity and that environmental regulations are not a major cause of current energy problems.

The United States currently has 149 refineries producing 16.9 billion barrels—84 percent or U.S. consumption— per day. No new refineries have been built since 1976, and over 170 have stopped operating since then. Many refineries are operating at over 95 percent capacity, which can be harmful to facilities and reduce the flexibility of the industry.The geography of refining facilities and transportation routes also poses challenges to energy supplies.

Data and analysis from the Energy Information Administration (EIA) at the Department of Energy provides at least two important pieces of information needed to assess the relationship between the price of gas and the nation’s refining capacity. First, EIA reports that the refining process accounts for about 21 percent of the pump price of gas (June 2004), although the figure varies. The percentage of pump price attributable to the refining process has fluctuated between 7.8 and 31.6 since January 2000. It can rise and fall by over 10 percentage points in a month without necessarily having a direct correlation to ump prices. Lowering the cost of this part of the industry that processes crude oil into a form useful in vehicles may or may not significantly lower gas prices.

Second, EIA has reported that tight refinery capacity contributes to price volatility, while its effects on actual prices are negligible. However, EIA does contend that U.S. refining capacity will need to be expanded in order to keep pace with growing gasoline demand. Refining industry representatives often argue that complicated, stringent environmental regulations and an inefficient permitting process imposed on refineries are largely responsible for the high cost of doing business, leading to tight refinery capacity.

Industry officials argue that the cost of refining could be lowered, and that increased refining capacity is necessary for the long-term energy independence of the U.S. They claim that simplifying environmental regulations will lead to an increase in the number of refineries that are built because of decrease in the cost of refining, which will ultimately lead to lower gas prices for consumers. If oil consumption continues to rise in the U.S., the nation will have to import increased amounts of expensive refined oil rather than refine it at home.

According to the American Petroleum Institute (API), a medium size refinery may need to comply with a half a million federal environmental requirements each year in addition to local and state regulations. There are at least fifty federal air programs that apply to refineries including the New Source Review of the Clean Air Act. Regulations affect emissions of pollutants such as nitrogen oxides, sulfur dioxide, particulates, volatile organic compounds, and benzene. API reports that in 2002, refinery operators had about $5.4 billion in environmental expenditures, defined as costs that would not have been incurred if environmental issues had not been considered by the industry. Industry lobbyists say that the complicated network of regulations, coupled with an extensive permitting process, causes potential investors to choose to put their money other places, and this is why no new refineries have been built in nearly thirty years.

The refining industry has come under fire from critics who claim that companies close refineries to drive up prices. Some Members of Congress argue that oil companies have been reporting record profits, and that the government should not lower the cost of doing business by relaxing environmental regulations. Industry representatives contend that the refining part of the industry is still suffering, with percentages of return below those of other industries. They have noted the “cyclical” nature of industry profits and say their opponents are taking profit reports out of context.

Senator Ron Wyden (D-OR) has issued three reports in the last five years investigating what he deems to be anti-competitive nd anti-consumer practices of energy companies. He and other industry critics cite examples of released internal energy company memos that tout the advantages of maintaining tight refinery capacity.

Wyden, along with other Western Democrats including Barbara Boxer (DCA) and Dianne Feinstein (D-CA), have been particularly vocal in opposition to the closure of a Shell Oil Corporation refinery in Bakersfield, California, that supplies 2 percent of California’s gasoline supply and 6 percent of the state’s diesel. The Senators and consumer groups such as the Foundation for Taxpayer and Consumer Rights argue that the refinery was turning a higher profit than other refineries in California, and that Shell is closing the refinery to decrease supply and drive up prices. Shell attributed the closure to low oil supplies from the Kern River oil field. The Federal Trade Commission and California Attorney General Bill Lockyer (D) are separately investigating the refinery closure, and will determine if Shell is violating any laws. Shell has agreed to keep the refinery open until the end of 2004 to seek potential buyers.

Whether or not it is advantageous to oil companies to keep refinery capacity tight is a major point of debate.Members of Congress who are sympathetic to industry arguments have taken steps to increase the viability of the refining industry. Representative Joe Barton (R-TX) successfully pushed the Refinery Revitalization Act through the House of Representatives in June 2004. This bill will give the Department of Energy (DOE) increased authority to pursue a quickened permitting process for new and revitalized refineries in areas of high unemployment, called Refinery Revitalization Zones. The bill does not override any current federal environmental laws, although it does include the controversial measure granting DOE authority to designate Refinery Revitalization Zones.

Opponents of the legislation contend that DOE decisions will undermine local authority in refinery establishment, and that the department is not qualified as a regulatory agency. Those who believe that oil companies benefit from tight refinery capacity also argue that the bill might only lead to a geographical shift in refining capacity to areas that do not necessarily need it, rather than a net increase. John Dingell (D-MI), Ranking Member on the House Committee on Energy and Commerce, said that he opposes the Refinery Revitalization Act because it turns the Secretary of Energy into an “environmental czar”, and that the bill is based on the unproven premise that environmental regulations are the cause of tight refinery capacity. Dingell and other Democrats say they doubt the Senate will ever pass the legislation.

All sides of the refinery debate are calling for policies that will balance the interests of consumers, businesses, and the environment. Unfortunately, all sides are working toward their own version of the balance that should be sought. As long as gas prices remain high, constituents will continue to press Congress to do what it can to lower them.However, as noted by Senator Jeff Bingaman (DNM), there is no “silver bullet” that will solve the problem of high gas prices. There is no doubt that refining companies spend billions to comply with environmental regulations. Whether the regulations are the cause of tight refining capacity depends on who is consulted. If the cost of refining could somehow be reduced, it is uncertain whether savings of energy companies will necessarily fall back into the pockets of consumers.

Bridget Martin, originally from Helena, MT, is currently a senior at Vassar College in Poughkeepsie,NY. She is majoring in geology with a comparative politics minor. Bridget has worked as an intern for the Dutchess County Soil and Water Conservation District, at an organic farm in Montana and as a page in the Montana State Senate. She has also participated in the Presidential Classroom program. This summer, Bridget became the resident expert on the timely issue of high oil and gas prices as well as mercury contamination.

This article is reprinted with permission from The Professional Geologist, published by the American Institute of Professional Geologists. AGI gratefully acknowledges that permission.

Please send any comments or requests for information to the AGI Government Affairs Program.

Posted June 29, 2005

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