May 8, 2007 11:43 pm US/Central
Good Question: Why Not Build More Oil Refineries?
by Ben Tracy
(WCCO)
Average gas prices in the Twin Cities are flirting with $3 per gallon again. They have already topped that in other states and hit a new national average record of $3.07 per gallon. Experts said it's a supply problem. We're paying more because our refineries can't pump out enough gas to meet our demand. So why don't we just build more of them?
"We're dealing with the same spigot," said Dr. Akshay Rao, a business professor at the University of Minnesota.
He said the last refinery built in the United States was in 1976 and many have since closed. In fact, in 1985 there were 254 operating refineries. Today, there are approximately 142.
"There were marginal refineries that weren't making enough money closed," said Rao.
Existing refineries have been expanded and are actually producing record output. They process about 17 million barrels of oil each day, but Americans consume about 22 million. The difference is imported. This tight supply is why a fire or unscheduled maintenance at one refinery spikes the price at the pump. So, with all the demand, why not build a new refinery?
"If you want to distill it down to one reason it's probably money," said Rao.
A new refinery would cost $2 billion to $3 billion. Today's environmental regulations help keep our air clean but also make it much more expensive to run a refinery. Finding land is tough because nobody wants to live near a refinery.
"It's not easy to get a new refinery in place," said Rao.
There's also no doubt that current gas prices are making oil companies and refiners gallons of money. So some speculate that they don't want to build more refineries because that would increase supply and depress prices. That would cost them money.
"They would be in effect be depressing prices and margins and hurting themselves," said Rao.
Rao said it's simple if someone could make money on a new refinery, they'd build it.
"I wouldn't be betting on a new refinery showing up anytime soon because all the economic incentives are lined up against building a new refinery," he said.
Chevron said ethanol is another reason it won't build a new refinery. Leaders there said that bio-fuels will lower demand for gasoline.
However, not all American refineries are owned by oil companies. Some are owned by refining companies and that business isn't as good as it used to be. In fact, the energy department said refineries' profit margins peaked in the 1980s.
(© MMVII, CBS Broadcasting Inc. All Rights Reserved.)
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