Pain in the Gas: Refinery Troubles Push Gas Prices Higher

May 15, 2007 — -- With gas climbing to record prices, many Americans are wondering why they are spending more before the start of the summer driving season.

Charlie Herman, the senior producer in the ABC News Business Unit, has spent years covering the oil industry in the United States. He put together a quick FAQ on what has become a bottleneck in the country's petroleum infrastructure: refineries.

Oil and Gasoline Consumption

Every Wednesday, the Department of Energy's statistical branch, the Energy Information Administration, releases a weekly summary of U.S. petroleum use.

For the week ending May 11, the EIA reported that the nation's 149 oil refineries operated at 89.5% of their total capacity, processing 15.3 million barrels of crude oil per day, up .5% from a year ago. The refineries produced 9.1 million barrels of gasoline per day, up from the previous week.

Drivers, however, used 9.3 million barrels of gasoline per day, 1 percent more than a year ago. The United States has had to import 11.5 million barrels of gasoline per day. For the year, Americans have been consuming an average of 9.1 million barrels of gasoline per day, up just more than 1.7 percent from the same period a year ago.

The Nation's Refineries

The EIA reports that as of 2006, the nation's 149 refiners could process more than 17.3 million barrels of crude oil a day. As recently as 2001 there were 155 refineries nationwide that had a maximum capacity of 16.6 million barrels of crude a day.

Refinery capacity peaked in 1981, when there were 324 refineries that could process a total of 18.6 million barrels of crude oil per day.

More than quarter of a century later, there are now less than half that number of refineries, but they have a larger refining capacity thanks to newer, more technically advanced refining technology.

The Recent Outages

Experts agree that large numbers of outages and disruptions at refineries have contributed to the recent rise in gasoline prices -- including last week's 5-cent climb to an average U.S. price of $3.10 a gallon, a nominal record price.

"Crude oil could be free and you'd still have these high prices because you can't make enough gasoline," said energy economist Philip Verleger, who has been tracking the problems at the nation's refineries.

As of April, Verleger had found more than 30 unplanned refinery outages, one or two at the same refinery. He calculated "unplanned refinery shutdowns have depressed U.S. gasoline production by 400,000 barrels per day."

The annual switch from winter to summer fuels is also partially to blame for the recent spike.

"The summer blends we use now are more expensive, and refiners are federally mandated to [create] cleaner burning gasoline. Some of the regulations from state to state add to the cost," said Phil Flynn with Alaron Trading.

Also, refineries perform maintenance during the changeover because the machines aren't operating. As one oil company executive put it, the refineries are doing maintenance on the car now before driving it in the summer.

Fires, lightning strikes and even squirrels getting into the power room at a refinery in California have also caused several outages.

Is Low-Sulfur Diesel to Blame?

But Verleger also believes that new EPA requirements imposed on refiners to reduce the amount of sulfur in diesel fuel has had the unintended consequence of causing more refinery outages. Removing the sulfur appears to require running the refining units harder and at higher temperatures and higher pressure, possibly leading to some refining problems.

In its April report, The International Energy Agency wrote, "Anecdotal evidence suggests refinery reliability is deteriorating due to existing sulphur removal requirements, lowering average utilization rates … the need to run these units harder to meet the tighter specifications is leading to a higher incidence of unit failures, posing additional problems for refiners."

Translation: Requirements to reduce sulfur level could be reducing overall refining capacity.

Consumer Groups Weigh In

Groups such as the Consumer Federation of American blame oil company mergers during the past several decades for reducing the number of refiners to the point that a there is now a "domestic oil oligopoly."

The CFA's Mark Cooper argues refiners have underinvested in refining capacity and reduced gasoline inventories to the point that they cannot perform any maintenance without gasoline prices increasing, along with profits.

"If you give them [the refiners] the benefit of doubt, then they have horribly mismanaged this industry. They can't switch from winter to summer fuels without driving up the price a buck and they get away with it," Cooper said. "In a competitive industry they wouldn't get away with it."

Cooper will testify before Congress on May 16, and in his prepared testimony wrote, "The profitability of refining operations in the U.S. has grown far faster than the profitability of their overseas refiners."

Refiners React

"There are no bottlenecks in refineries," said Charles Drevna, executive vice president of the National Petrochemicals Association, the refiners' trade group. "Earlier on this spring, there were more outages than we would normally see, but they are pretty much coming back on line now."

Drevna said delayed maintenance of refineries was an issue currently because refinery workers had shifted from scheduled repairs to service gulf refineries damaged by hurricanes Katrina and Rita. Now, those workers are catching up with delayed maintenance projects.

But even with the planned and unplanned outages, Drevna stressed, "We are doing our utmost best to crank out as much product — gasoline and diesel — as we can. We are continuing to provide that product and the marketplace dictates what has happened at the pump."

He said the industry had been supplying refined product in the face of higher consumer demand.

Finally, as prices for gasoline have risen to record highs, "It makes no sense for refiner not to be running."

Why Not Build a New Refinery?

Financing, permits, environmental concerns and the securing of oil supplies are all substantial hurdles for any company to construct a new refinery.

"Clean" refineries are expensive, and despite recent profits the refinery business has traditionally been low profit margin business. The last refinery was built in 1976 in Garyville, La.

Arizona Clean Fuels hopes to construct a new refinery near Yuma, Ariz., at a cost of $3.5 billion. According to press reports, the company hopes to be up and running in 2011. Nearly two years ago, the company's CEO told ABC News' Betsy Stark he hoped to be up and running in 2010.

But even a new refinery won't solve the current situation.

"We can't build more refineries to get out of this," said Verleger.