About That Refinery Capacity...

So, we've all seen the price at the pumps rocketing upward in the last week or two. $3 gas is now cheap in many locations. The President rushed to relax environmental restrictions to ease the bottleneck in refining. There's all sorts of talk about how a switchover from the highly polluting additive MTBE to ethanol has tossed a glitch in the system, and how some refineries are out of service undergoing maintenance that they deferred last fall, because the Katrina-damaged units were still trying to get back online. It seems like there's all kinds of problems with our refining capacity.

I wonder how that could be. We're the world's leading economy, with very sophisticated technological and economic tools and forecasting capability. Just how has it come to pass that, every few months now, we run into a shortage of refining capacity that drives up the price of gas at the pump? Since the oil companies are bringing in record profits, how is it that some of that hasn't been invested back into building up our nation's security from such refinery snafus?

Maybe this passage from a 1997 internal memo from Texaco provides a clue:

"[T]he most critical factor facing the refining industry on the West Coast is the surplus of refining capacity, and the surplus gasoline production capacity. (The same situation exists for the entire U.S. refining industry.) Supply significantly exceeds demand year-round. This results in very poor refinery margins and very poor refinery financial results. Significant events need to occur to assist in reducing supplies and/or increasing the demand for gasoline."

Hmm. It appears that the very smart businesspeople at the oil companies realize that it may be more cost-effective for them to limit their production capacity than to be well prepared to produce the gas the country needs. I wonder if there are other ways that, by tinkering with the system, they could increase profits while simultaneously messing up our nation's gas supply?

Throughout the 1990s and into this decade, the major oil companies have continually reduced their working inventory levels for gasoline – even while the demand for gasoline has risen. In 1990 the supply level was about 30 days. In 2000 it fell to 23.8 days and more recently to about 22.7 days. This is precariously close to the 20 days of supply considered a bare minimum. Much of this inventory isn't even available to meet demand, but is needed to keep gasoline flowing through the refinery into the wholesale and retail system to the consumer: it's line fill in pipelines, tank bottoms, in-transit flow, etc.

Tighter inventories mean no cushion to deal with hiccups and temporary blips in supply, meaning that there is an increased likelihood of price spikes. Oil companies have converted the cost of carrying this inventory into a profit center, by forcing us to pay higher prices at the pump whenever there is a production hiccup.

Like say, taking a refinery offline for maintenance, or not bringing an offline one back online fast enough, in an environment where refinery capacity was, for some reason, already tight.

Constraining production capacity, and keeping on-hand inventories low. No wonder Mr. Creosote's brother got that hefty retirement package - he's a genius!

Today Nanci Pelosi, the Democratic leader in Congress said:

We have two oilmen in the white house. The logical follow-up from that is $3 a gallon gasoline. There is no accident. Tt is a cause and effect. A cause and effect. How dare the president of the United States make a speech today in April, many, many, many months after the american people have had to undergo the cost of home heating oil. A woman told me she almost fainted when she received her home heating bill over this Winter. And when so many people making the minimum wage, which hasn't been raised in eight years, which has a very low purchasing power have to go out and buy gasoline at these prices? Where have you been, Mr. president?

Why, right where they want him to be, of course.