U.S. push for biofuels causes oil industry to scale back refinery expansion

A few days ago, OPEC threatened consumers and governments that green fuels will push prices for oil products even higher, because the global rise of biofuels may make OPEC countries decide to slow down their oil production expansion. The announcement was seen as scare-mongering by many and condemned by the chief of the International Energy Organisation, who said biofuels do not have that large an impact as OPEC thinks. He urged OPEC countries, who have been making gigantic profits, to do their duty and to invest in increased production (earlier post).

Now, a similar tone is being used by the oil industry in the US, equally enjoying windfall profits. Oil executives warn that America's very ambitious proposed legislation on biofuels - currently being debated in Congress - might make oil refiners decide to scale back their expansion plans. This could keep gasoline and diesel prices high for years to come.

The irony of these statements is that communities and governments have been investing in biofuels precisely because oil prices and refined products have been at record highs. Oil companies have been making monster profits, and should be using this money to invest in expanding production and refining capacity. But they don't, and now they blame biofuels instead. Oil companies already have scaled expansion plans back by nearly 40 percent. They threaten with more cancelations if Congress passes the legislation now before the Senate.

All the talk about biofuels threatening gasoline production is the latest attempt to blame ethanol on Big Oil's failure to meet our energy needs. The ethanol industry continues to grow while oil refiners continue to make excuses for maintaining their profitable status quo. - Ron Lamberty of the American Coalition for Ethanol

The U.S. Senate is currently debating the major new Energy Bill, which contains proposals for huge increases in ethanol production. The latest (of over 100) amendments include a call for an expansion of the renewable fuels standard (RFS) to 44 billion gallons by 2022, with 30 billion of that coming from advanced biofuels. The current language in the bill proposes a 36 billion gallon RFS by 2022, with 21 billion of that coming from renewable fuels. A three-part list of these ongoing discussions and amendments can be found here (part1, part 2 and part 3).

Given this radical effort to promote biofuels in the U.S., oil companies see growing uncertainty about future gasoline demand and little need to expand refineries or build new ones. Oil industry executives no longer believe there will be the demand for gasoline over the next decade to warrant the billions of dollars in refinery expansions - as much as 10 percent increase in new refining capacity - they anticipated as recently as a year ago:
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This shortage of refineries frequently has been blamed by politicians for the sharp price spikes in gasoline, as was the case last week by Republican Sen. James Inhofe during the debate on the senate Energy Bill: "The fact is that Americans are paying more at the pump because we do not have the domestic capacity to refine the fuels consumers demand", Inhofe complained as he tried unsuccessfully to get into the bill a proposal to ease permitting and environmental rules for refineries.

This spring, refiners, hampered by outages, could not keep up with demand and imports were down because of greater fuel demand in Europe and elsewhere. Despite stable - even sometimes declining - oil prices, gasoline prices soared to record levels and remain well above $3 a gallon.

Consumer advocates maintain the oil industry likes it that way: "By creating a situation of extremely tight supply, the oil companies gain control over price at the wholesale level," said Mark Cooper of the Consumer Federation of America. He argued that a wave of mergers in recent years created a refining industry that "has no interest in creating spare (refining) capacity."

Only last year, the Energy Department was told that refiners, reaping big profits and anticipating growing demand, were looking at boosting their refining capacity by more than 1.6 million barrels a day, a roughly 10 percent increase. That would be enough to produce an additional 37 million gallons of gasoline daily. But now the expansion has come to a halt, and the oil industry says it may cancel even more expansion plans if Congress approves the Energy Bill's ambitious targets for biofuels.

"These (expansion) decisions are being revisited in boardrooms across the refining sector," said Charlie Drevna, executive vice president of the National Petrochemical and Refiners Association.
With the anticipated growth in biofuels, "your getting down to needing little or no additional gasoline production" above what is being made today, said Joanne Shore, an analyst for the government's Energy Information Administration. In 2006, motorists used 143 billion gallons (541 billion liters) of gasoline, of which 136 billion was produced by U.S. refineries, and the rest imported.

Drevna, the industry lobbyist, said annual demand had been expected to grow to about 161 billion gallons (609 billion liters) by 2017. But Bush's call to cut gasoline demand by 20 percent - through a combination of fuel efficiency improvements and ethanol - would reduce that demand below what U.S. refineries make today, he said.

"We will end up exporting gasoline," said Drevna. Asked recently whether Chevron Corp. might build a new refinery, vice chairman Peter Robertson replied, "Why would I invest in a refinery when you're trying to make 20 percent of the gasoline supply ethanol".

Valero Corp., the largest U.S. refiner producing 3.3 million barrels a day of petroleum product, recently boosted production capacity at its Port Arthur, Texas, refinery by 325,000 barrels a day. But company spokesman Bill Day said some additional expansions have been postponed.
"That's not to say we've changed our plans," Day said in an interview. "But it's fair to say we're taking a closer look at what the president is saying and what Congress is saying" about biofuels. He said there's a "mixed message" coming out of Washington, calling for more production but also for reducing gasoline demand. "It's something that we have to study pretty carefully," said Day.

Democratic Sen. Byron Dorgan said consolidation of the oil industry into fewer companies has left them with no incentive to expand refineries. "It's a perverted system that does not act as a free market system would act," said Dorgan. "If you narrow the neck of refining, you actually provide a greater boost to prices which is a greater boost to profitability. Richard Blumenthal, the attorney general of Connecticut, wants Congress to require refiners to maintain a supply cushion in case of unexpected outages.

In the 1980s, Blumenthal said at a recent hearing, refiners were producing at 77.6 percent of their capacity, "which allowed for easy increases in production to address shortages. In the 1990s, as the industry closed refineries, ... (that figure) rose to 91.4 percent, leaving little room for expansion to cover supply shortfalls."

More information:
Forbes (AP): Gasoline Refinery Expansions Scaled Back - June 18, 2007.

GreenCarCongress: Update on the US Senate Energy Bill, part 1, part 2, part 3.

Reuters: U.S. law to spur new oil refineries a bust so far - June 15, 2007.