The Offshore Drilling Fallacy

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Open the California coast and the offshore waters of Florida and the
Carolinas to new oil drilling and prices at the pump will drop,
contends Republican presidential candidate John McCain. And Democratic
rival Barack Obama soon after eases his opposition to offshore
drilling, with the same hope.

All this despite warnings from the federal Energy
Information Agency that even wide open offshore drilling wouldn’t
influence gas prices for at least 10 years.

Meanwhile, the reality of oil refining on the West Coast
over the last 20 years makes it plain that producing new oil off
California will probably never impact pump prices significantly. That’s
because of one simple question: Where would they turn the oil into

The bottom line here is that there is no refinery capacity
in or near this state to make new oil into gasoline. That is no
accident, either. It is a deliberate policy of big oil companies like
Chevron, Shell and ConocoPhillips.

Some of the most compelling evidence that oil companies
know limited refining capacity leads to high gas prices and big profits
came in an internal Texaco Inc. memo written in 1996 and exposed in
2005 by a California consumer group called the Foundation for Taxpayer
and Consumer Rights, since renamed simply Consumer Watchdog.

The memo, never denied by officials of the old Texaco,
since absorbed by Chevron Corp., declared that "the most critical
factor facing the refining industry on the West Coast is surplus refining capacity. Supply significantly exceeds demand year-round. This results in very poor refining margins and very poor refinery financial results."

A similar internal Chevron memo of approximately the same
vintage warned that "if the U.S. petroleum industry doesn’t reduce its
refining capacity, it will never see any substantial increase in
refinery margins."

Well, no new refining capacity has been added in California
since then. None is now proposed. California refineries consistently
operated at 90 percent of capacity or above for the last few years,
which actually translates to full use because of down time for

And what do you know? There’s no more whining from oil
companies about low refinery financial margins. Rather, each quarter
seems to produce new profit records.

Meanwhile, more than 1 million gallons of gasoline per day
are imported into California. Which means that if and when offshore oil
from California enters the gasoline marketplace, it will not come
through California refineries unless today’s supplies from Alaska are
shipped elsewhere. Rather, new oil will be refined in Japan, Singapore,
Australia or Indonesia and brought back here at great shipping cost.

Why not elsewhere in America? Because refineries in other
parts of this country also operate very close to capacity, as not one
new refinery has been build in the United States since 1976.

How likely is any new oil to lower prices when it has to undergo a 12,000-mile round trip before reaching the gas pumps?

more, today’s imports would be even higher if Shell Oil had gotten its
way early in this decade. For much of the early 2000s, Shell tried hard
to close its Bakersfield refinery, but various state officials led by
then-Attorney General Bill Lockyer resisted. Shell consistently claimed
the refinery could never again operate profitably.

Most likely, the company’s real motive was outlined in
those once-secret Texaco and Chevron memos. Cutting refinery capacity
raises prices and profits. We see this when gasoline prices spike every
time a refinery fire or accident reduces output even for a few days.

But Shell did not get its way. Rather than closing the
Bakersfield facility, the Dutch-British oil giant eventually sold the
plant to Utah-based Flying J Inc., which until then was best known for
operating truck stops.

Flying J has reaped profits from that refinery ever since,
while its gas stations generally price their fuel below average levels.
The company presently plans to double its capacity at Bakersfield. So
much for Shell’s assertion that the facility couldn’t make money.

Add to all this the fact that any newly authorized offshore
oil exploration could not produce fuel for at least seven years, maybe
10, plus the fact that oil exploration ships are currently fully booked
for years to come, and you arrive at the conclusion that the McCain
offshore oil talk is nothing more than expediency designed to take
advantage of consumer alarm over high gas prices. And Obama’s
willingness to go along contradicts his campaign theme of bringing
major change to American political and economic life.

The bottom line is that new offshore oil drilling would
likely not help anyone much, except politicians. Not oil companies, who
didn’t actively press for it until after McCain raised the subject.
They’d rather let things go along as they are, since they can’t process
any more oil in this country, anyway. Not consumers, who won’t see
prices drop much soon unless they continue reducing consumption.

So why even think about doing it?

Thomas D. Elias is a syndicated columnist who covers California issues (e-mail: [email protected]).

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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