Posted on: Sunday, May 23, 2004

Need to import gasoline growing

By Brad Foss
Associated Press

WASHINGTON — Everyone knows the United States relies heavily on foreign oil. But most people don't realize the nation also increasingly needs imported gasoline — a trend that's contributing to the recent spike in prices at the pump.

The creeping dependence on imports leaves the country more vulnerable to international supply disruptions and exposes the growing inability of domestic refiners to provide relief when markets get tight.

This growing market constraint, amplified lately by the trouble foreign refiners have had meeting new Environmental Protection Agency standards for cleaner-burning gasoline, did not develop overnight.

More than half the nation's refineries have shut down since 1981, no new ones have been built and none are planned. Moreover, the industry has kept capacity growth at remaining facilities to a minimum, despite rising demand.

"Refiners are spending all of their money just meeting all the new (environmental) regulations," Bill Greehey, the chairman and chief executive of refiner Valero Energy Corp., said. "They don't have the money for strategic projects to add to their capacity, so it's not surprising that we're short capacity."

At the same time, Greehey acknowledged that this dearth has allowed the industry to enjoy phenomenal profits these days.

"The thing that's been more surprising than anything else is the strong demand for gasoline," even with pump prices averaging more than $2 a gallon nationwide, Greehey said.

L. Bruce Lanni, a senior oil analyst at A.G. Edwards in San Francisco, estimates that refining margins are more than double what they were a year ago. That has sent the stock prices of independent refiners Sunoco Inc., Tesoro Petroleum Corp. and Valero, among others, soaring.

U.S. refiners don't hide from the fact that profits are at near-record levels these days. Instead, they use this fact to dispute claims that they are withholding product from the market, arguing that there is every incentive to produce as much gasoline as possible.

Often left unsaid, however, is the fact that domestic refiners no longer have the wherewithal to produce enough gasoline to meet peak summer demand. With just over a week until Memorial Day, the traditional start of the summer driving season, U.S. gasoline inventories are nearly 8 million barrels below the five-year average at this time.

The U.S. refining industry is "producing record supplies, but it's still not enough to meet the current demand," said Aaron Brady, an associate director at Cambridge Energy Research Associates in Cambridge, Mass. "That puts the spotlight on imports."

Make that a floodlight. The United States now imports upwards of 1 million barrels a day of gasoline during the peak summer driving season, more than twice as much as it did 20 years ago, according to government statistics. Imports arrive from South America, Europe and the Carribbean, and mostly serve the refinery-poor East Coast.

Lately, though, gasoline imports have been "lower-than-expected" given the sharp increase in demand, according to the Energy Department, whose statistics show that foreign shipments were more than 100,000 barrels a day below year ago levels in April.

This has exacerbated the supply crunch. Other factors underpinning today's lofty gasoline prices include: geopolitical instability, speculative buying on futures markets and the high cost of oil, which accounts for roughly $1 out of every $2 motorists spend at the pump.

But when asked what steps Washington plans to take to address the high prices, Energy Secretary Spencer Abraham said: "We are looking at how we can increase our refinery capabilities in the U.S."

In the meantime, analysts are concerned that European refiners are having difficulty meeting EPA guidelines for low-sulfur gasoline that went into effect in January.

Yet, according to some, domestic refiners aren't necessarily producing as much gasoline as they can.

"They don't want to take the risk of overproducing" and thereby cause prices to drop, said Ken Miller, an analyst at the Houston oil consultancy Purvin & Gertz.