Refinery Backlog Prompts Spike in Gas Prices

Published on

All Things Considered (National Public Radio)

The following story was broadcast on NPR’s All Things Considered radio program on Monday, May 7th, 2007. Listen to the audio of the program here.

MICHELE NORRIS, host: From NPR News, this is ALL THINGS CONSIDERED. I’m Michele Norris.

ROBERT SIEGEL, host: And I’m Robert Siegel. The Energy Department released its weekly survey of gasoline prices this afternoon. And for the first time this year, the average price for unleaded regular has topped $3 a gallon, $3.05 to be precise.

It’s not the cost of crude oil that explains the $3 signs going up at gas stations around the country, as NPR’s Scott Horsley reports, most of the extra money drivers are paying these days is going to refiners.

SCOTT HORSLEY: This isn’t the first time drivers have seen $3 gas. Prices briefly climbed that high after Hurricane Katrina, and again last summer. But AAA spokesman Jeff Sundstrom says familiarity doesn’t make the high prices any easier to take.

Mr. JEFF SUNDSTROM (Spokesman, American Automobile Association): It’s unpleasant for everyone to pull up the gas pump and have to put $40 or $50 worth of gasoline in their tank, and I think there is a concern for the overall economy when gas prices get this high.

HORSLEY: The reason gas prices are climbing is the nation’s refineries aren’t making enough. According to the Energy Department, refineries operated at just 89 percent of capacity in the month of April; their second lowest level for that month in 10 years. Like a drought-stricken city draining its reservoir during what should be the rainy season, the nation has been forced to tap its gasoline stockpiles this spring, leaving them well below average with the busy summer driving season still to come.

Gasoline production has been limited by a series of refinery shutdowns, some for planned maintenance, others because of accidents. Energy analyst Philip Verleger worries that high prices last year may have caused refiners to overwork their facilities, setting the stage for more trouble this year.

Mr. PHILIP VERLEGER (Energy Analyst): When one sees very high margins, there’s every incentive to push the refinery to make as much gasoline as possible. Obviously, if you push a facility too hard you also increase the risk of an accident.

HORSLEY: Verleger says refiners have also been challenged by requirements for cleaner-burning fuel, and by a shortage of skilled workers.

Mr. VERLEGER: In one sense, the refiners are paying the price now for the fact that they laid off so many workers in the ’80s and the ’90s when margins were not so good.

HORSLEY: But consumer advocate Jamie Court of sees a more sinister explanation. He compares this year’s string of refinery shutdowns to the California electricity crunch six years ago, when some power-plant operators deliberately idled plants in order to drive up the price.

Mr. JAMIE COURT (Consumer Advocate, When oil companies aren’t being watched, and when there’s no legal bar for them to close down refineries so they can jack up the price of gasoline, they’ll do it, and there’s nothing we can do.

HORSLEY: Whatever the explanation, refiners have been enjoying outsized profits. The nation’s biggest refiner, Valero, for example, made less gasoline in the first quarter than it did a year ago. Because each gallon was worth more, Valero’s profits surged by 29 percent.

AAA‘s Sundstrom says from a driver’s perspective, politicians need to rethink the nation’s energy policy.

Mr. SUNDSTROM: The reality is for many Americans driving is not a discretionary activity. They have to get to and from work. They’ve got to get their kids to school. They need to get back and go to the grocery store. So they may simply be cutting back on their purchases of other products and services and still buying the gasoline they need.

HORSLEY: A month ago, the Energy Department predicted gasoline prices would be lower on average this summer than last. But AAA warns, pump prices may climb even higher before they start to go down.

Scott Horsley, NPR News.

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