Refinery closings elevate gas prices

By Doug Abrahms
Gannett News Service

WASHINGTON — Drivers should brace themselves for the kind of price swings at the pump that Californians are seeing, experts say, in large part because there are fewer U.S. refineries trying to keep up with increasing demand for gasoline.

Energy companies have closed more than half of their U.S. refineries since 1981. Oil companies say they closed unprofitable refineries, and that environmental regulations have made it difficult to build new ones.

But consumer groups and some lawmakers wonder whether energy companies have closed refineries to stifle competition and increase profit.

The result of fewer refineries turning crude oil into gasoline is that any unplanned maintenance, pipe-

line problem or even a routine seasonal change in gasoline blends can send prices reeling. For example:

• California gas prices have risen 40 cents since Jan. 1 to more than $2 a gallon as refineries cut outflow to switch from winter to summer blends.
• A gasoline pipeline rupture from a refinery caused Phoenix motorists to wait in lines last summer.
• Gas prices shot up 50 cents a gallon in Chicago in 2000 because of refinery problems.

"The smallest problem seems to have a dramatic impact," said Rayola Dougher of the American Petroleum Institute, which represents oil companies. "We have a system really straining. We need more (refining) capacity."

But few short-term solutions are on the horizon. Most energy companies have no plans to build U.S. refineries, and Shell Oil plans to close one in Bakersfield, Calif., this summer.

The energy bill stalled in Congress offers a few limited incentives to add refinery capacity. An Energy Department spokesman acknowledged the problem but said the agency has no concrete proposals to address it.

David Hackett, an energy consultant for the California Energy Commission, said states could remove regulatory barriers to build refineries. California in particular could offer loan guarantees or other financial incentives for companies to increase storage capacity of gasoline to reduce shortages, he said.

"But there aren't any near-term solutions," Hackett said. "Consumer demand has outstripped refinery capacity."

High prices for crude oil, which is refined into gasoline, has helped push up gas prices about 20 cents a gallon nationwide this year, according to the U.S. Energy Information Administration. Regular gas averaged $1.715 nationwide Friday, closing in on a new high for the past 12 months.

But prices spiked even higher in the West as refiners cut back to switch to producing summer blends of gasoline designed to burn more cleanly in warmer weather.

Janet Rambeau has been shopping around for the best deal at the pump since prices soared near her Palm Springs, Calif., home. "I want to know especially why it's so expensive here, when I saw on CNN that the average price was $1.70 a gallon or $1.60 a gallon," Rambeau said.

California's tight refinery capacity and strict environmental regulations regularly make its prices among the highest in the nation.

But price spikes are also expected to appear in New York and Connecticut this spring when refiners in those states must begin adding ethanol to their gas mix to replace MTBE, an additive that causes water pollution. Prices could jump by 30 cents a gallon because fewer refineries can make this blend of gasoline, and supply bottlenecks could occur, according to the Energy Information Administration.

Tom Kloza, an oil analyst at Oil Price Information Service, which monitors the industry, expects another price spike nationwide before Labor Day, as gas demand grows when motorists take their summer vacations.

"The third quarter is going to be wild," Kloza said. "The problem with gas isn't a problem with crude. It's a problem of domestic refining capability."

The industry blames environmental regulations and new clean-air rules for making it too difficult and costly to upgrade old refineries or build new ones.

This year, the Environmental Protection Agency required companies to lower the sulfur content in gasoline, and some plants decided not to make the necessary investment and closed, said Gene Edwards, a senior vice president at Valero, a large refiner. States like New York will start adding ethanol to their gas, which not all refineries can produce, and which could require substantial upgrades, he said.

The United States will be forced to rely on more gasoline imports, he said. "We're running 100 percent of what's available," Edwards said. "There used to be more extra capacity in the system, but that's gone now."