JERRY HEASTER:

Refinery capacity runs short

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By JERRY HEASTER - Columnist

Date: 10/03/00 22:15

The preoccupation with tight oil supplies distracts attention from the much more pressing problem of inadequate crude refining capacity.

The troubling reality is that it helps little for OPEC to deliver more oil or the administration to tap the Strategic Petroleum Reserve when American refineries are running at nearly full capacity. Some refineries reportedly have even delayed maintenance to help ensure adequate supplies of heating oil as cold weather nears.

Why is refining capacity short? There are many reasons, and all of them have to do with U.S. society's reluctance to acknowledge the economic concept of trade-offs. It all gets back to the hoary admonition about there being no such thing as a free lunch.

Nevertheless, many Americans think solving problems is as easy as government mandating a solution without the need for any required reciprocal sacrifice in the bargain.

Refineries are, in this respect, a lot like landfills. Everyone knows they're critical to our existence, but nobody wants one in the vicinity of their existence.

The relentless expansion of environmental laws and regulations also has discouraged refinery construction. As a result, no refineries have been built in America for a generation. Instead, the existing refineries have been expanded, but this approach apparently has gone about as far as it can realistically be taken.

Both economic growth and an increasing population have substantially increased the demand for all oil distillate products. The most visible demand surge is related to motor vehicles, which despite fuel economy improvements are consuming 50 percent more gasoline than a generation ago.

Environmental mandates have hindered not only refinery construction but also the production process. Refineries not only are required to produce gasoline for mass consumption, but also have been forced to become boutiques. By one estimate, refineries are now required to produce nine different types of gasoline to comply with clean-air regulations.

With refineries going full tilt and demand steadily increasingly, something has to give. All it takes is a major refinery breakdown to create a crisis, because there currently appears to be no margin for error.

When supply disruptions occur, as they inevitably will in the absence of new refining capacity, it won't do any good to rail against Big Oil. The problem, which no political leader seems willing to discuss, is that Americans have huge appetites for oil products but no stomach for the environmental trade-offs demanded.

However, if Americans want to drive bigger vehicles, live in larger houses and use more-powerful computers, they must come to grips with the fact that there is no escaping the need to encourage construction of more refineries. Less objectionable energy sources are imagined by some as a viable alternative, but this is an exercise in self-delusion. In a $9 trillion economy serving some 275 million consumers, increased use of oil derivatives to meet energy needs is an inescapable given.

If oil's price is high enough to make retrieving it profitable, adequate supplies are assured. The same can't be said of transforming that oil into much-needed products.

Jerry Heaster's column appears Wednesdays, Fridays, Saturdays and Sundays. To reach him, write the business desk at 1729 Grand Blvd., Kansas City, MO 64108. To share a comment on StarTouch, call (816) 889-7827 and enter 2301. Send e-mail to jheaster@kcstar.com.

http://www.kcstar.com/item/pages/business.pat,business/3774cf09.a03,.html

-- It's the Refinery's Stupid! (whadya@mean?.com), October 04, 2000

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-- It's the Refinery's Stupid! (whadya@mean?.com), October 04, 2000.

Hmmm...I don't see any references to broken refineries in these posts of yours, due to Y2K or otherwise.

-- Buddy (buddydc@go.com), October 04, 2000.

Hmmm...I don't see any references to broken refineries in these posts of yours, due to Y2K or otherwise.

-- Buddy (buddydc@go.com), October 04, 2000.

Excellent observation! Whats your point pinhead?

-- It's the Refinery's Stupid! (whadya@mean?.com), October 04, 2000.

October 4, 2000 http://www.nytimes.com/2000/10/04/business/04SHOC.html

Circumventing an Oil Crisis

By RICHARD A. OPPEL Jr. ---------------------------------------------------------------------- ---------- The Associated Press Last month, President Clinton decided to release 30 million barrels of oil from the nation's Strategic Petroleum Reserve, a move considered tame compared with Washington's response to the oil shocks of the 1970's. ---------------------------------------------------------------------- ---------- THe Associated Press This summer, when prices soared above $2 a gallon in the Midwest, consumers got a glimpse of the panic seen in the 1970's. But Midwest prices soon dropped significantly. ---------------------------------------------------------------------- ---------- It seems like an echo of another era.

More than a quarter of a century ago, when the world experienced its first energy shock, gasoline and heating oil supplies tightened, crude oil prices rose more than threefold and industry profits skyrocketed. Today, with the Organization of Petroleum Exporting Countries once again in the driver's seat, gasoline and heating oil supplies are tight, crude oil prices have tripled and industry profits are soaring.

So why have the reactions been so different? The latest oil squeeze, of course, has been considerably milder than in the 1970's and has not been accompanied by the widespread public panic caused in part by the announcement that Arab nations were cutting off oil supplies to the United States. But just as important in explaining the contrast between then and now, analysts say, is how American policy makers have reacted to OPEC's moves.

In 1973, Washington responded to the oil embargo by taking its already draconian system of price limits and other government controls on oil and gasoline and expanding it. Much of that system was still in place six years later, during the nation's second big oil crisis, which followed the fall of the shah of Iran.

Oil company executives were hauled before Congress and skewered over soaring prices and profits, and the government started major price- fixing investigations. Little ever came of those cases, but one piece of wisdom did eventually emerge: instead of making the situation better, the government controls actually worsened the supply problems.

Today, policy makers are striving to work with market forces instead of fighting them. In the debate over President Clinton's decision last month to release 30 million barrels of oil from the nation's Strategic Petroleum Reserve, for example, critics  led by Gov. George W. Bush of Texas  derided the move as an improper intrusion of politics into the marketplace. And compared to Nixon- and Carter- era controls, it was a tame step.

Despite assertions by some politicians that industry misbehavior may have played a role in this year's high prices, many policy makers have now embraced the idea that markets left to their own devices work better than government controls  a notion that, at best, was on the fringes in Washington at the time of the first oil shock.

The United States is not in the clear yet, of course, as it faces winter with very low inventories of heating oil and natural gas. Already this year, after California's recently deregulated power markets threatened to run short of electricity, prices soared and there were calls for reimposing controls on consumer prices.

And, it is difficult to compare the current situation with 27 years ago, when consumers feared not just high prices but that they would not have enough fuel to drive their cars or heat their homes. Then, even though overall supplies fell much less, imports of crude oil and petroleum products briefly dropped more than 20 percent, according to the American Petroleum Institute. By contrast, while overall worldwide supplies have not kept pace with rising demand, current imports are only a bit lower than year-earlier levels.

Furthermore, in the 1970's, sharp changes in the price of oil had a far greater effect on the economy, and inflation, than now.

Still, in most of the country, angst over rising prices today seems surprisingly subdued. "It's kind of curious that we could have this kind of rise in oil prices with as little apparent feeling about it in the United States," said Paul A. Volcker, the former chairman of the Federal Reserve. "Maybe the country is just too prosperous to worry about it."

The energy proposals that Mr. Bush, the Republican presidential candidate, brought out last week  including opening part of the Arctic National Wildlife Refuge to exploration and incentives to promote coal and nuclear power  could test the willingness of Americans to rebalance environmental and energy priorities in the face of higher prices. For his part, Vice President Al Gore, the Democratic presidential candidate, favors investments in mass transit and incentives to encourage the use of more fuel-efficient vehicles and alternative energy sources.

One leading oil economist, Philip K. Verleger Jr., calculates that the oil price increase since OPEC cut production in March 1999 could cost consumers almost a half-trillion dollars worldwide by next year  nearly as much, in inflation-adjusted dollars, as during the oil embargo.

The biggest difference is that in the 1970's the government oversaw price controls on gasoline; set allocation rules that spread petroleum among industries and regions; and, at the beginning of the decade, even maintained quotas on imported oil. All that turned federal officials into central planners dictating much of what industry and retailers were allowed to do. Suspicions abounded, meanwhile, about conspiracies to fix prices or drive smaller competitors out of business  fears abetted by the lack of the comparatively open petroleum market that has developed in the years since.

Price controls, instituted in 1971 by President Richard M. Nixon to curb inflation and maintained on the oil industry well after they were abandoned in other sectors of the economy, "were one of the most anomalous episodes in American history," said Eliot R. Cutler, who served for a time as energy czar under President Jimmy Carter. "Here you had this Republican free-market president imposing and maintaining the most elaborate set of price controls Americans had had in any time other than war."

Eventually, he said, the poor results "were viewed as evidence that the free market was a much more efficient mechanism compared to a bunch of government bureaucrats."

The lessons learned during the 1970's had a profound effect on political leaders in both parties, said Daniel Yergin, the chairman of Cambridge Energy Research Associates and author of a Pulitzer Prize-winning history of the oil industry. That was particularly true among those who had always preferred a strong government regulatory role.

"For many Democrats, the shift to a more market-oriented view of the world began with their experience with energy price controls," he said. "That was a major turning point."

As the 1970's began, almost no one in Washington realized just how precarious the nation's oil supply had become. While the nation had imported oil for many years, by far the bulk was produced domestically. The government maintained quotas on imports that had long served to protect politically powerful American producers by limiting cheaper and more plentiful foreign oil. Those were not lifted until early 1973.

But domestic oil production had leveled off in 1970 while demand continued to soar, giving Mideast producers drastic new leverage over the United States. That was made clear in October 1973, when, as the Yom Kippur War began, Saudi Arabia and other Arab nations angrily reacted to President Nixon's military aid for Israel by halting shipments of oil to the United States.

Within weeks, prices for gasoline and heating rose sharply, even with the price controls, as refiners were allowed to pass through the increase in crude oil costs. Some schools shut down to conserve energy; gasoline lines left drivers waiting for hours; and gasoline pedaled under the table in some cases sold for over $1 a gallon.

The price controls and allocations were linked to past profits and consumption. Retailers were supposed to make the same profit margins they previously earned, for example, while doing nothing more than passing on increases in wholesale gasoline costs. And allocations were pegged to prior petroleum sales.

Late in his term, President Carter began the process of lifting the controls, but they were not abolished completely until President Ronald Reagan took action in 1981.

"Part of the reason we haven't had gas lines this year is that there has been no serious exogenous shock to the system like we had in the 1970's," said Vahan Zanoyan, president of the Petroleum Finance Company, a Washington consulting firm. But an equally important reason now, he added, "is that we're letting the market decide the prices."

This year, Mr. Yergin said, the nation experienced a glimmer of the panic seen in the 1970's when prices soared above $2 a gallon in the Midwest. But within a month of prices reaching their peak, the Midwest had the cheapest gasoline in the nation. Suppliers, free to shift gasoline and oil from other parts of the country and eager to cash in on the huge profits refiners were making, flooded the region with fuel, constrained only by transportation needs.

"So often, when you get into really tight markets, what's really critical is logistics," Mr. Yergin said. In the past, price controls and allocation measures "actually did as much as anything to create gas lines by preventing the market from moving supplies around to where demand was a real crisis."

Those controls did not really hurt oil industry profits, however, and by January 1974, the major integrated companies began reporting income gains of 50 percent or more. In Washington, Senator Henry M. Jackson, the Washington Democrat, paraded executives from the nation's seven major oil companies before his Permanent Subcommittee on Investigations, grilling them on television about their role in the crisis.

But profits were not the only thing that made the industry an easy target. Compared with today, the industry was a mystery, with far less data publicly available and no worldwide marketplace that reported crude oil prices. Oil producers would simply post prices, and there was essentially no spot market for crude.

"Everyone was calling for price- fixing cases," Mr. Cutler said, "but there was no evidence of a mass conspiracy."

There were some settlements in the many millions of dollars for violations of price controls and allocation rules, and some states won other settlements from oil producers. But the Justice Department in 1983 ended a six-year antitrust inquiry into the four major oil companies operating in Saudi Arabia because regulators failed to uncover "any remediable violations of the antitrust laws." Two years earlier, the Federal Trade Commission had abandoned a case that had sought to break up the nation's major oil companies on the ground that they had engaged in collusive behavior.

The pricing power earlier enjoyed by the major oil companies, known as the Seven Sisters, began to disintegrate once OPEC began flexing its muscles and demanding higher prices for its crude. Britain sold huge quantities of oil drilled from new fields in the North Sea, further decoupling oil from the old "posted prices" system.

And by the early 1980's, producers, distributors and refiners could trade futures contracts that gave them the right to sell or buy crude, heating oil and gasoline at a set price later on.

"The introduction of these commodity markets changed the whole behavior of the business," Mr. Verleger, a former Treasury Department energy adviser, said. Today, the world consumes about 75 million barrels of oil daily, but as much as a half-billion barrels are traded on some days, estimates Mr. Verleger, who is now at Brattle Group, a consulting firm in Cambridge, Mass.

The current structure of the market still allows for collusive practices; the whole purpose of OPEC is to control supply and, as a result, prices. In the United States, the F.T.C. is investigating complaints by Mr. Gore and other politicians that refiners this summer may have fixed prices in the Midwest  accusations the industry has hotly denied.

But while the market responds far more quickly today to match supply with demand, another major structural change in the industry may not turn out so well for consumers, Mr. Verleger said. Major oil companies have steadily been selling refineries to independent operators for a fraction of their replacement cost, leaving these smaller companies, with their higher credit costs and smaller capital budgets, to produce a greater share of the nation's gasoline, jet fuel, heating oil and other products.

These smaller companies, he said, are more likely to keep low inventories of oil and run their plants full blast only when profits on refining are attractive  factors that played a role in the low inventories of refined products this year. Moreover, if the United States faces a refining capacity shortage later this decade for new varieties of clean-burning fuels, these companies may be less prepared to deal with it.

The refining market today "is at once both more competitive for petroleum products," Mr. Verleger said, "and much less financially secure."

-- RefinerysStupid Is Stupid (RefinerysStupid@IsStupid.com), October 04, 2000.

Do ya think ya can make your point in something less than the length of a novel there cpr?

-- It's the Refinery's Stupid! (whadya@mean?.com), October 04, 2000.

Why does the illogic of Refinery Stupid resemble the disconnected ramblings of R.C. and ELane Core JUNIOR?

-- RefinerysStupid Is Stupid (RefinerysStupid@IsStupid.com), October 04, 2000.

Can U try it once again in FUCKING ENGLISH? Hmmm...give it a shot.

-- It's the Refinery's Stupid! (whadya@mean?.com), October 04, 2000.

Do ya think ya can make your point in something less than the length of a novel there cpr? It's the Refinery's Stupid! (whadya@mean?.com), October 04, 2000.

THE POST FROM OPPEL WAS IN THE N.Y.TIMES AND FROM THE A.P.

DO THEY RING A BELL AS A QUALIFIED SOURCE, NUMB NUTZ?

October 4, 2000 http://www.nytimes.com/2000/10/04/business/04SHOC.html Circumventing an Oil Crisis By RICHARD A. OPPEL Jr. ---------------------------------------------- ------------------------ ---------- The Associated Press

-- RefinerysStupid Is Stupid (RefinerysStupid@IsStupid.com), October 04, 2000.

Qualified for WHAT Shit 4 Brains?

As Usuall CPR NO ONE KNOWs OR UNDERSTANDS the point U R trying to make here? If there is one.

DUH!

-- It's the Refinery's Stupid! (whadya@mean?.com), October 04, 2000.

TODAY's SCORE CARD FOR OIL BOZOs:

http://cnnfn.cnn.com/markets/commodities.html

LIGHT CRUDE (NYM)
November 00 ($US per bbl.) 10/4 15:11 31.60 31.90/31.35 31.49 31.43 - 0.640 119664 BRENT CRUDE (IPE)
December 00 ($US per bbl.) 10/4 15:13 30.80 30.90/30.50 30.65 30.65 - 0.520 69572 HEATING OIL (NYM)
November 00 ($US per gal.) 10/4 15:11 0.960 0.969/0.951 0.964 0.963 - 0.000 50695 NATURAL GAS (NYM)
November 00 ($US per mmbtu) 10/4 15:11 5.28 5.29/5.15 5.29 5.29 - 0.058 54293 UNLEADED GAS (NYM)
November 00 ($US per gal.) 10/4 15:12 0.868 0.870/0.844 0.850 0.848 - 0.032 29705 metals

-- cpr (buytexas@swbell.net), October 04, 2000.