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May 24, 2007 8:26 am US/Mountain
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Why Aren't There More Refineries?
by Alan Gionet
DENVER (CBS4) ―
Gas up and share the common misery of higher prices. Gasoline prices jumped again overnight Wednesday and AAA Colorado says the current record price for a gallon of regular unleaded is $3.34.
We can say, "current record price," because we've been setting records every day now since May 7. That's up eight cents from last week, 50 cents higher per gallon than a month ago and 53 cents higher than a year ago on this day.
We've heard the reasons. Supply and demand is responsible for most of it. Gasoline suppliers and refiners take their bigger profits in the summer. We continue to increase our demand for fuel every summer and sure enough when supplies get tight, prices rise. Hill Petroleum's Vice President and General Manager Troy Hill says he'd like to sell more but he can't. They can only get "About a third of what we normally get." Hill cites refining capacity as one of the industry's biggest problems.
With prices as high as they are, figures out Wednesday show refineries are making a gross profit of 76 cents on every gallon you buy - and that's down from a few days ago when it was closer to $1 a gallon. That makes you wonder, with profits so robust, why would there be a shortage of refining capacity?
The Energy Information Administration says the nation's refineries are currently running at 91 percent of their capacity. That's up in recent weeks, perhaps because of criticism due to unusually low rates of operation, possibly due to the fact of increasing margins.
Closing down to drive prices up however seems counter-productive. Refineries have to sell fuel to make money. Refineries do shut down in the summer and more are expected to shut down in the weeks ahead. That's because, refineries, like your car, need periodic servicing. They have to be cleaned or there's risk of fire or explosion. Most do it in the better summer weather.
It's overall refining capacity that many wonder about. There hasn't been a new refinery built in the U.S. since 1976. But many have been closed. In the early 1980s there were more than 300 refineries.
Today there are fewer than half that number. The reason some have closed relates to the ability of refinery owners to meet new environmental demands. It's also one of the reasons there haven't been any new refineries built. Undertaking an environmental impact study prior to starting to seek permits for a new refinery is likely to cost companies millions. When few people want a refinery in their backyard and opposition is likely, it has made the risk greater. Refiners have opted instead for increasing capacity.
American refining capacity remains at about the same level it was at 30 years ago. But while refining capacity hasn't changed, America's thirst has increased. Through the 1990s refining profits were slim. Refineries could be bought for pennies on the dollar. It wasn't until 2004 that profits began to rise. Hurricanes Katrina and Rita in 2005 really cut into refining capacity and refinery profits started to climb even faster.
That's when some refiners began to think about expanding even more. But expansion takes time says John Jechura, assistant professor of chemical engineering at the Colorado School of Mines. "If a company was to decide today to make a major expansion, it would take about five years before we saw it."
And so that's where we are today. Some expansion of refinery capacity will come on line in the next few years, but not right away. And refiners have even been timid about those expansions because of fears that increases in the amount of ethanol production will cut into demand and cut profits.
Now the question remains about America's gasoline needs and whether lawmakers should be forcing refiners to add capacity. You may not like the explanation about refining capacity, but those are the reasons it is where it is today.
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