Oil refining capacity and its contribution to the rise in gasoline prices
National Public Radio (NPR) – Morning Edition
Limited refining capacity is one of the reasons for the recent run-up in gasoline prices. In California, Shell is closing one of its three refineries in the state. Jamie Court, of the Foundation for Taxpayer and Consumer Rights, accuses Shell of playing its own OPEC-style game, choking off gas from one refinery so it can push up prices. But the oil giant says the oil fields in the area are running dry.
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RENEE MONTAGNE, host: Much of the blame for high gasoline prices can be attributed to the
rising cost of crude oil. But crude oil accounts for only about half the cost of a gallon of gas. The rest is a combination of taxes, distribution and refining. According to the Energy Department, the price paid to refiners rose by 15 cents a gallon in the first three months of the year. NPR’s Scott Horsley reports.
SCOTT HORSLEY reporting: Oil refineries around the country have been running just about flat out, trying to keep pace with drivers’ growing demand for gasoline. That’s especially true in California where refineries are working at 98 percent capacity, and where the price of gasoline has been stuck above the $2 mark for 11 weeks in a row. That’s why some politicians and consumer advocates are protesting Shell‘s decision to close one of its three California refineries
by September 30th. Jamie Court, of the Foundation for Taxpayer and Consumer Rights, accuses Shell of playing its own OPEC-style game, choking off gas from one refinery so it can charge more for the gas produced at its other two.
Mr. JAMIE COURT (Foundation for Taxpayer and Consumer Rights): We only have 13 refineries in California now and we had 37 in 1983. If we lose one more, that’s a way of Shell reducing supply, keeping inventories low, shorting the market so the price of gas goes up. It’s better for Shell to charge $3 per gallon for gas than it is for it to charge $1.07.
HORSLEY: Shell denies that’s what’s driving its decision to close the refinery in Bakersfield, California. Instead, Shell spokesman Cameron Smythe blames a dwindling supply of crude oil in the surrounding fields of Kern County.
Mr. CAMERON SMYTHE (Spokesman, Shell): Any assertion that Shell is making this decision to either drive up the cost of gasoline or to restrict supply is false. The decision to close the refinery is because of the decline of San Joaquin Valley heavy crude that supplies the refinery.
HORSLEY: Oil production in Kern County is declining, but state officials say there’s at least 20 years worth of oil left in the ground there. In fact, ChevronTexaco plans to increase its drilling in the region. Oregon Senator Ron Wyden, whose constituents are also paying more than $2 a gallon for gasoline, has asked the Federal Trade Commission to investigate the planned refinery
shutdown. California’s attorney general is also investigating. But Tom Dressler, of the attorney general’s office, says this may turn out to be a problem that law enforcement can’t solve.
Mr. TOM DRESSLER (California Attorney General’s Office): I mean, as a general rule, it’s damn hard for government to force a private enterprise to keep operating a business that it doesn’t want to operate.
HORSLEY: In response to the criticism, Shell says it’s willing to sell the Bakersfield refinery, but that so far it has not received any credible offers. California Senator Barbara Boxer disputes the company’s claim that the refinery is not economically viable. She points to internal documents showing the plant brought in more money per gallon for Shell than seven other refineries.
Senator BARBARA BOXER (Democrat, California): This is not a company right now that has that much credibility and we don’t want to see a loss of capacity here because gas prices are so high, even a small jolt will hurt it.
HORSLEY: The United States hasn’t built a new refinery in 20 years. High costs and environmental restrictions discourage new construction and even though existing refineries have grown more efficient, capacity nationwide has shrunk by 11 percent in the last two decades. Claudia Chandler, with the California Energy Commission, says oil companies have no incentive to produce surplus gasoline that might lead to lower prices. So while California’s refining
crunch is an extreme case, it’s not alone.
Ms. CLAUDIA CHANDLER (California Energy Commission): The nation and California are kind of hand-in-hand in this. I mean, the nation’s, you know, following California. This is not a leadership role, I want to point out.
HORSLEY: In its first-quarter earnings report last week, Shell noted that declining margins on the West Coast had jumped by 40 percent from a year ago. The company added those margins may be kept high in the future by low stockpiles of gasoline and by an imbalance of supply and demand.
Scott Horsley, NPR News, San Diego.
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