Oil: U.S. has crude – but too few refineries
Sacramento Bee
Oil prices set another record Tuesday, all but guaranteeing that $3-a-gallon gasoline will become widespread in California before too long. One analyst said the average price could reach $3.25 by Memorial Day, the start of the summer driving season.
Anxiety over supply disruptions in Nigeria and the prospect of war in Iran helped push crude oil to an all-time high of $71.35 a barrel, up 95 cents from the day before, on the New York Mercantile Exchange.
A consumer group blamed oil industry profiteering for the run-up at the pump. But others said legitimate factors are at work, including the phase-out of the fuel additive MTBE on the East Coast and lingering refinery production problems on the Gulf Coast. Above all, there is the relentless surge in consumption around the world, which has led to chronically high oil prices.
“This is not something that is going to go away quickly,” said Severin Borenstein of the University of California Energy Institute in Berkeley. “Oil supplies are limited, and we’re coming to grips with that.”
The average price for self-serve regular already has surged past $3 in several California cities, while AAA said the statewide average was up to $2.96. Sacramentans paid an average $2.85 a gallon Tuesday.
Prices generally rise in spring — when demand goes up and refineries perform their annual maintenance, which curbs production. But what’s happening this year is unusual by any measure, with prices heading into record territory.
Denton Cinquegrana, who tracks West Coast markets for the Oil Price Information Service, said the California average for self-serve regular could hit $3.15 to $3.25 by Memorial Day, May 29. The record for the state is $3.05, the result of the post-Hurricane Katrina meltdown in the nation’s energy markets.
Some motorists say they’re beginning to alter their driving and spending habits in response.
“When fuel’s this high, this truck stays parked more,” said Robert Savage of Ione, who was filling his pickup with diesel at $2.96 a gallon Tuesday at the Chevron station on College Town Drive in Sacramento.
Still, the likelihood of another “oil shock” creating economic ruin seems remote. Oil prices are still below the inflation-adjusted peak of more than $80 a barrel recorded in the early 1980s. And the U.S. economy demonstrated after Katrina that it could withstand a dramatic run-up in gas prices. Economic output slowed down, but not enough to spark a recession.
“The economy was able to shake this off,” said energy economist James Hamilton of the University of California, San Diego. “That makes me a little more optimistic than I would have been about $70 oil.”
The Labor Department said Tuesday that gas contributed to a 0.5 percent jump in wholesale prices in March, but economists said energy costs so far aren’t causing widespread inflation.
The latest increase in crude prices has been fueled by geopolitical concerns. Production has been curtailed in Nigeria by violence, while the markets are rattled over the prospect of a U.S. attack on Iran because of its nuclear program.
Prices sailed past $70 even though U.S. inventories are 25 percent higher than a year ago and are the highest they’ve been since 1998, according to the U.S. Department of Energy.
Yet while there’s oil available, the nation lacks the refinery capacity to turn it into gasoline, analysts said. Gas inventories are actually 5 percent below last spring’s, a key reason why gas prices are going up.
“You don’t have enough refineries to refine all that oil that’s coming in,” Cinquegrana said.
The United States hasn’t built a new refinery since the mid-1970s, because of red tape and environmental concerns. The refinery shortage only grew worse with Hurricanes Katrina and Rita.
Three major Gulf Coast refineries remain out of commission, said Chris Mennis, an independent energy trader based in Aptos.
Mennis said the phase-out of MTBE on the East Coast is another factor keeping gas prices high.
The refiners are taking out the MTBE, which has been found to contaminate groundwater, and replacing it with ethanol, which is considerably more expensive, he said.
The Foundation for Taxpayer and Consumer Rights, based in Santa Monica, issued a report Tuesday blaming the high prices on corporate greed.
“Clearly this is all about increased refining margins and profits,” said Jamie Court, the foundation’s president.
“This is all about oil refiners being opportunistic and seizing on developments that don’t affect their production costs… using that as an excuse to jack up the price of gasoline.”
Fed by the Katrina disruptions, the nation’s five biggest oil companies reported profits totaling $25 billion in the third quarter last year, led by ExxonMobil’s historic $10 billion quarter, prompting congressional hearings into price gouging.
Court said more fat profits are coming. “They’re getting us going and coming, and it’s going to be an ugly summer,” he said.
But Joe Sparano, president of the Western States Petroleum Association in Sacramento, dismissed the charges as “conspiracy theories.”
He said numerous state investigations into California gas prices have turned up no wrongdoing by oil companies.
“There’s no market manipulation, there’s no collusion,” he said.
Borenstein, the UC Berkeley expert, said refiners’ profit margins are likely increasing. That doesn’t necessarily signal that anyone’s doing anything wrong, he said; it could be just a matter of market economics.
If there aren’t enough refineries to go around, those in the refining business will make more money, he said. It’s the same as a housing boom that lifts everyone’s prices.
“They make their money the same way you make money when you sell your house,” Borenstein said.
On the other hand, he said the conditions are such in California that a refiner could make more money by deliberately withholding supply, he said.
But nobody’s proven it’s happening, he said.
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The Bee’s Dale Kasler can be reached at (916) 321-1066 or [email protected]
The Associated Press contributed to this report.
