Consumer expert: Hurricane exposes need for more U.S. refineries

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Gannett News Service

WASHINGTON — Consumer advocate Mark Cooper warned in a 2001 report that gas prices would soar above the $1.70 a gallon cost at the time unless U.S. oil companies increased refining capacity.

Four years later, with gas prices topping $3 a gallon, the research director at the Consumer Federation of America made the same argument at a House hearing Wednesday on energy.

“What we did in 2001 was we called for more refineries,” he said. “But nobody is doing anything systematically to fix it.”

Hurricane Katrina knocked out up to 20 percent of U.S. refining capacity last week, causing gas prices to rise by 46 cents a gallon and exposing a major weakness in the nation’s energy infrastructure.

Americans are paying about $3.1 billion more a week for gas than a year ago, an average of about $28 per household, according to Energy Department figures.

Consumer groups and some energy experts point to Katrina’s impact on energy costs as an example of why the government should press oil companies to build surplus refineries that can be called upon during emergencies.

In the long-debated energy bill that Congress passed this summer, just one item addressed refining capacity — a tax incentive for oil companies to build more facilities.

Some Gulf refineries have restarted in the past week, but the Energy Department reported Thursday that six large plants remain closed and another four are operating at limited capacity.

Despite a constant increase in demand, oil companies are processing less oil than they were nearly 25 years ago. In 1981, refineries produced 18.6 million barrels of gas and other products a day, compared to a current level of 17 million barrels a day, according to the National Petroleum & Refiners Association.

But refining capacity has grown some since the 1990s, said Bob Slaughter, who heads the refining association. Expanding the number of refineries would take time, but companies could push more gallons of gasoline out of existing plants, he said.

“I think that companies will be adding capacity this year,” he said.

The industry would like to build more refineries, Slaughter said, but has been hampered by state and local government regulations on siting. He added Congress could make it easier to build new refineries as well as offer incentives to companies to make it more affordable.

During House and Senate hearings this week on the high price of gas, lawmakers discussed a number of options to bring relief to consumers, including passing another energy bill that would call for opening up vast swaths of the U.S. coast to drill for oil and gas and raising mileage standards for vehicles.

Sen. Byron Dorgan, D-N.D., proposed legislation on Wednesday to slap a 50 percent tax on the profits oil companies make from the portion of crude oil above $40 a barrel. The money would be refunded to consumers, but oil companies could reduce that tax by increasing refining capacity or expanding U.S. oil production.

“The oil companies are reaping $7 billion a month in windfall profits, money that comes straight out of our economy and that most consumers cannot afford,” Dorgan said in a statement. “At the same time, there is no corresponding increase in expenses for them.”

Jamie Court, president of Foundation for Taxpayers and Consumer Rights, said the oil companies deliberately reduced their refining capacity in the 1990s to make more money. So when a disaster hits, he added, there is no reserve to tap into and gas prices skyrocket.

“Oil companies absolutely have no incentive to (build more refineries), even if someone pays for it,” he said. “The only way oil companies are going to build excess capacity is if some government agency tells you to.”

Shell Oil planned on closing a refinery in Bakersfield, Calif., last year until the state attorney general threatened an antitrust investigation, Court said. Shell later sold the plant to a large diesel retailer.

Electric companies are required by state regulators to maintain excess capacity to generate electricity in case of emergencies, he said, and the situation should be the same for oil companies.

“I think Katrina was a major wakeup call to both politicians and the public that the issue is not crude oil but refining capacity in the United States,” Court said. “I think we need supply controls.”

Some in Congress have called for price controls on gas, but many congressional Republicans as well as the Bush administration oppose the idea, saying price controls could lead to long gas lines.

Instead, we need to focus on supply, Cooper said.

Right now, consumers need to limit their trips, tune up their cars and inflate tires to save gas, he said. In the long term, he added, Congress should raise mileage requirements on vehicles and require oil companies to build more refineries instead of giving them tax breaks as an incentive.

“Why do I have to bribe them to do the socially responsible thing,” he said. “You could require them to have a reserve margin just like you do with electricity.”

Consumer Watchdog
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