The REAL Reason Gas Prices Are So High

July 22, 2007 at 5:26 am | Posted in America, American politics, corruption, oil | 20 Comments

It is because oil companies control oil refineries and they have had no incentive to do anything about their crappy refineries over the past thirty years. What incentive do they have to make better refineries? Certainly no competition forcing them. Certainly no governmental pressure to force them. So we get a corrupt and degrading market that forces Americans to pay higher prices, not because the free market wills it, but because oil companies have no market pressure to improve their product.

Compare the oil industry, specifically the refinery section, to the computing industry, specifically the highly advanced software/internet section. Note the vast difference in competition levels. Really anyone in the world can create software. What does this do for the industry? Why there is no better competition, and no stronger, more advanced and expansive industry that I can think of.

You want lower prices, America? Perhaps it is time to talk about breaking up these massive oil companies, particularly break them from the oil refinery business. They obviously suck at it, to put it mildly.

“There is a lack of investments in modern equipment,” Ms. Merritt said. “The overwhelming preponderance is that if you have inadequate engineering and equipment, poor process safety management, and poor staffing, you’re set up for a catastrophe.”

Ms. Merritt, who was appointed by President Bush and will retire after her five-year term ends in August, also said the Occupational Safety and Health Administration does not conduct enough inspections. “There is no enforcement,” she said.

OSHA defended its record and said it had inspected almost 500 refineries from 1994 to 2004. The agency also said it would inspect all refineries under its jurisdiction within the next two years. “OSHA inspections of refineries have proven to be effective,” the agency said.

Meanwhile, demand has been rising relentlessly, providing little respite to the nation’s aging energy infrastructure. Even as consumers complain loudly about high prices, they show no signs of scaling back. Gasoline consumption reached 9.66 million barrels a day in the first week of July, the second-highest level on record.

“The cushion that used to be available five to seven years ago for these unplanned perturbations is no longer there,” said Jeet Bindra, Chevron’s president of global refining. “When a refinery has a hiccup, there are consequences on supplies.”

Part of the problem, analysts and refiners said, stems from the hurricanes two years ago. In Louisiana and Mississippi, many refineries were flooded, and about a quarter of the nation’s refining capacity was shut for weeks.

“Since refining has become such a wonderful business, refiners have delayed maintenance,” Mr. Robinson said. “But when they do go down, they stay down for longer and they discover all sorts of problems.”

In late March, for example, a fire at a large compressor at a BP refinery in Whiting, Ind., caused a hydrogen-treating unit that removes sulfur from some oil products to shut. That meant BP had to turn off a crude oil unit for early maintenance. Two weeks later, a brief power disruption damaged another distillation tower. And in July, a third crude oil tower was shut briefly so operators could fix a small leak. Since the first incident, the 405,000 barrels-a-day refinery has been running at about half its capacity.

Not all refining disruptions are the result of similar incidents. Refineries typically schedule yearly maintenance that sometimes requires them to halt production entirely. But even these long-scheduled shutdowns can now take longer to complete.

No refineries have been built in the United States in over three decades, because refiners say they are too costly. Instead, they have been expanding their existing refineries.

All this is happening as the industry goes through another golden age. After 20 years in the doldrums, the refining business has never been so good for oil companies. Refining margins — the difference between the price of crude oil and the value of refined gasoline made from it — have shot up as much as $25 a barrel for some types of crude oil, compared with about $5 a barrel just a few years ago.

So let us review:

1. Lack of investment in modern equipment
2. No enforcement
3. Relentlessly driving demand
4. Refiners delay maintenance, stay down longer
5. Long maintenances take even longer to complete
6. No new refinery in THREE DECADES! Reason: Too costly…but
7. Refining business has never been so good to oil companies.

Is this right?

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20 Comments »

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  1. When adjusting for inflation and comparing historical gasoline prices, we actually see that the price of gas is not really all that high. Most of the blame for increasing prices can be placed on our rather high inflation of the last decade paired with record-low gas prices in the mid- to late-90’s. (Remember when regular was about a buck a gallon?) Being that gasoline is a commodity, its price is very volatile and we’ve been both in an environment of rising prices in general as well as at the end of a streak of record low prices.

    In other words, nothing to see here.

  2. Jesse is right. as the article says, “The disruptions are helping to drive gasoline prices to highs not seen since last summer’s records.” Oil refinery breakdowns are helping to drive gas prices, but its not the only reason prices are going up.

  3. Europeans have been paying much higher gas prices than we have for quite some time, so I guess a globalization affects us all, it’s inevitable that we’re going to start paying more as well.

    Still, it’d sure be nice to see gas prices below the $2/gallon line again (to say nothing of the 35 cents per gallon I remember being charged at the pump when I was a little kid).

  4. Explaining the price of gasoline in the US is not going to happen in a single essay. It is a major commodity, highly subsidized by the American government (but not by the Europeans). We are also the only industrialized country that does not have an excess profits tax.

    REAL gas prices were higher after the 1973 OPEC embargo, causing some REAL responses. Those are lacking now. The important part of this post, imo, was that the interests of the oil corporations (and to the extent that this is an oil administration, the government) and that of consumers are divergent. Refineries are but one example, and not a trivial one.

    And yes, continuing to subsidize hydrocarbons to create the illusion that government is helping us, is not the answer. Artificially low prices distort the location decision, devoting too many resources to transportation, induce allocating too many resources to heating homes, etc. Eventually this house of cards will collapse, giving those countries that recognize that we are best served by HONEST prices, the function of which is to convey information to economic actors as to the optimal use of resources. We are deluding no one but ourselves, as we will discover when we bequeath our children the “wrong” infrastructure.

  5. Europeans pay so much more not because it’s more expensive there but because they tax gasoline at a much higher rate to subsidize public transportation. Those subsidies are feasible in Europe since they aren’t married to their cars like we are in the US. In short, I doubt we’re going to see European pricing models for gasoline in this country anytime soon.

  6. Jesse,

    When adjusting for inflation and comparing historical gasoline prices, we actually see that the price of gas is not really all that high.

    I know that the oil spikes of the 70s produced higher prices when adjusted for inflation, but those were spikes, not long term increases. I firmly believe that we will not see lower prices for gas. There are many reasons for this, but two, I think are the biggest.

    1. China and India. Their growth and demand for fuels will obviously increase the cost of supply.

    2. But here in America, we really have to ask ourselves why our oil companies are not building newer, better oil refineries especially when the evidence is there that oil refineries are in a golden age financially for oil companies. You’d think it would be the perfect time to streamline your services, make your equipment more efficient. That does tend to make you a richer company. I do realize that oil companies don’t really need to make more money, seeing that they are setting record profits and all, but still, I believe this will come back to haunt us at an inappropriate time.

  7. erich,

    We are deluding no one but ourselves, as we will discover when we bequeath our children the “wrong” infrastructure.

    This is an excellent point to make, and one I’m trying to drive at, but didn’t really expound on. It really is astounding that any business in a highly capital market has not created a new refinery in over 30 years. In all other businesses, such a move would mean death to your business. You have to keep up with the competition. But there never was any real competition in the oil industry was there?

  8. The high the cost of a gallon of gas the sooner we’ll be rid of it. I hope the price goes up.

  9. arj,

    But higher prices don’t stop smokers from continuing to buy cigarettes. Why should it stop our addicted nation from continuing to gulp billions of gallons of oil? In fact, the higher prices have done nothing at all to curb our driving.

  10. I have definitely changed my driving habits due to the higher price of gasoline. I no longer drive to visit my son and his family 70 miles away from me. I am a widow on a fixed income and work full time. I now just use the telephone. It will never make up though for all the hugs and kisses my grandchildren are losing. But I always remember that God is totally in charge of everything. When it gets too bad, He will step in and for that I am truly grateful. I also want to thank Mr. Bush for his wonderful and honest leadership. I am still looking for those weapons, Mr. Bush. Ooops…..you must have made a small mistake, one that affects everyone’s life. Have a blessed day, Mr Bush.

  11. I work in the industry, to answer the 7 points in regards to the US refining sector (sorry, just seeing this post now almost a year later):

    1 – There’s been tons of investment, primarily into upgraders to ensure cleaner fuels, but also into capacity expansion. The US adds the equivalent of about one medium sized refinery every year via small expansions and/or debottlenecking at existing refineries, a process commonly referred to as “capacity creep”.

    2 – Big holes in safety inspections and enforcement have definitely been exposed. Enforcement issues aside, the safety problems were largely the result of refiners cutting corners when the business was a lousy money loser for a long time in the 80s and 90s and then having institutionalized that culture and not fixed it. Speaking very broadly, there are of course companies that have excellent safety records.

    3 – Gasoline demand did rise steadily for years in the US, it is now declining and petroleum gasoline demand is being eaten into further by ethanol. Globally, demand for all oil products is still rising though, but primarily in the rapidly developing Non-OECD countries while the OECD is stagnant.

    4 – Refiners aren’t so much deliberately delaying maintenance as being forced into much longer maintenance as a result of their now much more complicated kit required to produce these cleaner fuels. More units need work, and more units are dependent on each other so that when one goes down they all now have to where they didn’t before. Add to that a general dearth of available refinery maintenance crews/manpower/expertise.

    5 – Ditto 4.

    6 – No new refineries is true, but see #1 regarding expansion. Plus when you add in the foreign (primarily US and Caribbean) export refineries who are configured to specifically aim product at the US, and the glut of ethanol, today we actually have a badly oversupplied US gasoline market. Refiners are really worried now and some are looking for the door (Valero looking to sell some of its poorer refineries).

    7 – When you wrote this post, refiners were probably at their peak. The so-called “Golden Age of Refining” is over now. Take a look at what refiner equities have done since then (look up VLO or TSO for example on Yahoo Finance). They’re getting a bit of a bounce as I write the past few weeks, but it ain’t gonna last, especially as the Indians prep to bring on their massive Reliance Jamnagar refinery expansion (as I call it “the refinery that ate India” – you wouldn’t believe the size of this thing) in a few months and further glut the global gasoline market.

    Which may lead you to wonder then why gasoline prices are so high if there’s a glut of US gasoline. Answer: it’s a global oil market. The spread of gasoline over crude in the US is getting compressed, but with strong demand for oil outside the US, the baseline for crude continues to rise and the fact that the spread of gasoline over crude (the so-called “gas crack”) is getting thin obviously ain’t gonna be much comfort to the American consumer if the baseline is rising faster as it is.

  12. Americans or so addicted to oil that it doesn’t really matter how high the prices go. They will give up other things to buy gas before they really start worrying about prices. Sad, but many of them won’t even bat an eye when they can’t afford gas but decide to use massive amounts of credit to get it.

  13. Exactly what are we supposed to do? If you own or lease a vehicle then you are stuck with it for a period of time. Most of us cannot simply adjust our lifestyles away from automobiles because we must use them for our daily commutes. We can only really control our discretionary vehicle usage. Mass transit and carpooling can only have sporadic or coincidental benefit. We did not design this system and at this point we are literally only passengers being taken for a ride.

  14. BS…

    No new refineries? Know why? Environmentalist are opposed to the construction of any.

    A small amount of new exploration and domestic sources of oil? Know why? Thank your local tree-hugger again. We don’t want to mess up Anwar or the Gulf… I mean, when Omar, Saudi Arabia, etc. drill and drill without serious environmental impact, and reap huge rewards for it, that’s one thing, but if we dropped one rig in Anwar it would instantly kill a species of elk off the face of the planet… That’s what I’ve heard anyway.

    Don’t bit*h about oil prices and pain at the pump when you aren’t willing to address the real issues. Are these the only factors? No of course not. Supply and demand is really the culprit more than anything. But, before you get off on blaming the big, bad, evil corporations… look at the real reasons for lack of production, lack of refinery capacity, etc.

    Wake up and stop looking for Dr. Evil to blame.

    Also, it may have something to do with the 8-cylinder, 3 ton, SUV in front of me… you know, the one with the “global warming” tag. Yay… you gave $50 toward a cause then did everything in life that shows you want everyone else to be responsible.. but YOU NEED that gas guzzler to take your two little darlings to dance class and soccer games.

    *pfft*

  15. We have about 20 million barrels/day of oil demand in the US and about 17 million b/d of refining capacity (which typically runs depending on the time of year 85-95% utilization rates). So call it we’re short maybe 5 million b/d on average of product supplies. However, there’s plenty of other nearby refining capacity feeding the US – Virgin Islands, Canada, Europe, Aruba, even Venezuela. In short, especially with the ethanol glut (we’ll ignore the food problems that’s causing), the US is well supplied with oil products. You may not think that looking at the price of the pump, but that’s because that price is largely a reflection of the underlying price of crude which is going up on global supply and demand issues along with financial flows into commodities as investments (though the later is a bubble that is going to burst…though still leaving the basic global supply-demand problem in place).

    The US no longer has a refining problem. Don’t believe me? Go to Yahoo Finance and check the price of any major US refining company over the past few years (be sure to get a pure play refiner and not an integrated oil company that is benefitting from the high price of crude). After their share prices ran up to the stratosphere, they’re going back in the toilet again. Valero (VLO), Tesoro (TSO), Western Refining (WNR), ALON (ALJ). Refining ain’t such a great business anymore, we’ve got plenty of capacity to meet our needs, and refiners are starting to hurt again.

  16. This is such totally false garbage. It is the Democratic energy agenda of “Hate US Oil & No Drill” that has caused the US not to be able to do anything about oil prices controlled by foreign countries.

    This article is so typically “Hate US Oil” refineries, so it must have been written by a “No Drill” Democrat.

  17. Yo Seldon, you have no clue what you’re talking about. Oil is a global commodity, set by people ultimately trading global supply and demand fundamentals. You could open up every inch of land in the US for drilling, the most you would do is make a tiny dent in prices for a brief period. The issue is basic and simple: there is strongly rising demand for oil, but we are not finding anywhere near as much as we consume globally. We consume over 30 billion barrels a year globally. Even if ANWR and US Gulf of Mexico sub-salt and Florida offshore and US East Coast offshore turned into a bonanza far beyond anyone’s expectations, you’d maybe find one year of global consumption worth of reserves. In short, a blip. With global demand rising anywhere from 1 to 2 million barrels/day every year and new supplies rising maybe half of that if you’re lucky, and with global discovery rates having peaked in the 1950s (!) and having halved (!) every decade since then, the problem goes far beyond any piddly thing US discoveries could do. Now, could ANWR or the like help give a tiny little cushion to help us as we try to transition to other fuels? Yes. As long as it is matched with 100 other things (primarily conservation, but also other alternative fuels) that can together combine to help. But what you need to produce that result in the market is high prices.

    I am really sick of people who think the US political sniping paradigm holds the answers to big global problems. Wake up dude.

  18. Everyone is way over analyzing this topic. It’s real simple to understand. Oil is denominated in US dollars worldwide. The Fed has been printing money like there is no tommorow. This causes the value of dollars to go down and the price of oil to go up. Its no more complicated then that.

    This printing of money is also what has caused the mortgage crisis. Lenders flush with money needing a place to invest all of it, lend money to people with poor credit. This process creates a bubble that artifically raises real estate values. Then the bubble pops!

    Dont believe all the nonsense about too little refining capacity and too much demand. Those things play a factor but a very small one. You can blame George Bush, the Fed and the Wars for gas price inflation.

    Gadiantons robbing you of your wealth just like in BOM times.

  19. Hallehlujah Marc! Somebody had to get it right. Although all the factors written about here are contributors to the price of fuel, none effect the price more so than Marc’s explanation. An inflationary economy begins with acceleration of money creation to accommodate the government’s budgetary needs. The Bush regime has been doing this ever since they took office (and I mean “took”). Over a trillion dollars spent on the war in Iraq, Fannie Mae and Freddie Mac bailouts, the recent $145BN economic “stimulus” package, billions spent on oil exploration and ethanol subsidies and yet in typical Republican fashion, no new taxes. In fact, taxes have been drastically cut for the richest Americans and for big corporations in the Republican “trickle down theory”. Where did the money to pay for these things come from then? The answer is that the Fed just printed it. No one will know, they thought, because we can hide it out there in the global economy, as other countries have to save dollars for crude oil purchasing thanks to the standard. It’s a beautiful system if you’re in the club because big oil and our friends in OPEC who negotiated the dollar standard can help us by manipulating the price. You know it’s a manipulation by the ever increasing record profits. If the market really required these prices, the margins wouldn’t change unless the corporations were enabling cost reductions or some other form of internal savings, or both the supply and the demand were going up, generating more business. The profit trend would not be uniformly industry wide either. In addition, the World Bank and the IMF can keep the developing nations in check with us through debt while also allowing U.S. corporate interests to set up and control the infrastructure of exploiting these countries for their natural resources. Wonder why Paul Wolfowitz was appointed President of the World Bank in 2005, with no background in economic development, but a well known penchant for keeping the U.S. as the pre-eminent power in the world? If you research this, you’ll find the correlations between the dollar’s value and the price of crude. At its record high of over $130/barrel, the price of crude coincided directly with U.S. investment banks (the same banks that make up the Fed, which is a private, for profit corporation, btw) 2nd qtr. reports. These reports were disastrous and reflected the losses and projections of the sub-prime loan debacle and the credit crunch. The thing that scares the hell out of me is that several of the biggest producing countries, Iraq (and many say this is the real reason for the invasion), Iran, Nigeria, and most recently, Venezuela (who have discovered the largest oil deposit in history) are bucking the system and switching over to the euro as their new standard and going off the dollar. As more countries, particularly China and India, the ones with the most voracious appetites, start doing business with these producing countries in euros, the dollars that they’ve been hoarding to buy crude will be worthless for the most part, and will come flooding back to the U.S., exposing their worth, and driving value down even further. Chaos ensues as inflation will reach proportions that were akin to Argentina in 1989 (4,923%!), or worse. It all depends on how much the Fed has been printing. As is always the case with rapid inflation, the price increase in Argentina was fueled by rapid expansion of the money supply. This then has a ripple effect on the economies of other countries who are tied to the dollar, because of the global leadership role the U.S. has always played. Holding U.S. dollar assets is one common way that people in high-inflation countries protect their wealth from inflation. Wealthy members of these societies often deposit funds in American banks or hold stock in U.S. firms (this is called “capital flight”). Less wealthy citizens often hold $100 bills. This has always been stable because it’s tied to oil, and the U.S. has, up until now, been fiscally responsible and not involved in a money sucking war. So you see the potential crisis here. You may also understand, that at this stage, with so much at stake, why this has to be kept from the people. An easy distraction is to blame supply and demand, crippled refining, etc. These are things common people can wrap their heads around and they seem fixable. If everyone knew the dollar were teetering on the brink of extinction, the run on the banks would make the Great Depression look like a shallow divot. Let’s just hope that the new administration brings with it some smart money people who will know how to quietly and skillfully bail this sinking ship out.

  20. Let’s take an even more macro view of the situation.

    The population is increasing at alarming rate.

    World demand for oil is increasing. China and India’s demand for oil, natural gas is increasing at an alarming rate (these are huge populations wanting a society that looks like the US which consumes 25% of the oil resources)

    Peak Oil or rather the age of cheap oil is upon us.

    http://wolf.readinglitho.co.uk/index.html
    http://www.lifeaftertheoilcrash.net/


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