So Why Is Gas So Expensive?

[Lemur]

Excellent article on the subject to be found here. Lots of chewy bits of goodness in the article, but here's a fascinating passage:

Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years. (Business Journalism 201: You can reinvest in manufacturing capacity or ride the demand curve to higher profits.) Studies by Cambridge Energy Research Associates, a respected, oil-friendly consulting firm, indicate that even if all environmental regulations were removed from refinery construction, few would probably be built right away because of a 75 percent rise in construction costs since 2000, largely driven by the increased fuel cost of transporting building materials.

This interests me. I was given to understand that refineries were the crucial bottleneck in our gas/oil system, and that they weren't being built because of NIMBY communities and crazy red tape Federal madness. Why were so many refineries closed? Does anybody have the scoop on this? And please, no left-wing or right-wing crackpot conspiracy sources, if you please. I'd like some facts, if such are to be had.

[ICantSpellDawg]

Excellent article on the subject to be found here. Lots of chewy bits of goodness in the article, but here's a fascinating passage:

Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years. (Business Journalism 201: You can reinvest in manufacturing capacity or ride the demand curve to higher profits.) Studies by Cambridge Energy Research Associates, a respected, oil-friendly consulting firm, indicate that even if all environmental regulations were removed from refinery construction, few would probably be built right away because of a 75 percent rise in construction costs since 2000, largely driven by the increased fuel cost of transporting building materials.

This interests me. I was given to understand that refineries were the crucial bottleneck in our gas/oil system, and that they weren't being built because of NIMBY communities and crazy red tape Federal madness. Why were so many refineries closed? Does anybody have the scoop on this? And please, no left-wing or right-wing crackpot conspiracy sources, if you please. I'd like some facts, if such are to be had.

I don't know. It seems to be rather complicated no matter how you approach it. I hope shale helps. I hope new drilling helps. I hope alternative fuel helps. I hope any downturn in China helps. I hope pressuring oil producing countries helps. I hope making oil corporations more transparent helps. I hope reviewing trade policy helps. I hope reviewing our regulations helps. I hope transparency and restraint in speculation helps.

Who knows.

[Philippus Flavius Homovallumus]

The funny thing is you think the stuff is actually expensive in your neck of the woods, over here it goes up by about 2$ a litre a day!

[Xiahou]

Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years.

This interests me. I was given to understand that refineries were the crucial bottleneck in our gas/oil system, and that they weren't being built because of NIMBY communities and crazy red tape Federal madness. Why were so many refineries closed? Does anybody have the scoop on this?

I think the 25yrs of closures you highlighted would probably line up nicely with increased regulation.

Sure, its from an industry group, but still worth looking at:link. (I tried a cut/paste... but it didnt work in any readable fashion. )

Now, when you take that article and tie it in with the claim that evil refinery owners deliberately closed refineries to ramp up profits, I think you can see a kernel of truth. That is- they're not going to refine gasoline if there isn't a profit margin to make it worthwhile to do so. Interestingly, sky high oil prices have only made things worse- the refinery's raw material, oil, is much more expensive than ever before, and demand is also slackening due to higher prices leaving them with higher costs and a lack of sales growth. Interesting conundrum....

Edit: It's really interesting as one Googles around on this subject, to see some of the stories written years ago on the subject. Some are quite prophetic, others are totally clueless in hindsight.

[Crazed Rabbit]

Excellent article on the subject to be found here. Lots of chewy bits of goodness in the article, but here's a fascinating passage:

Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years. (Business Journalism 201: You can reinvest in manufacturing capacity or ride the demand curve to higher profits.) Studies by Cambridge Energy Research Associates, a respected, oil-friendly consulting firm, indicate that even if all environmental regulations were removed from refinery construction, few would probably be built right away because of a 75 percent rise in construction costs since 2000, largely driven by the increased fuel cost of transporting building materials.

This interests me. I was given to understand that refineries were the crucial bottleneck in our gas/oil system, and that they weren't being built because of NIMBY communities and crazy red tape Federal madness. Why were so many refineries closed? Does anybody have the scoop on this? And please, no left-wing or right-wing crackpot conspiracy sources, if you please. I'd like some facts, if such are to be had.

I think the last refinery built in the US was in the 70s. Think about that, in relation to the increasing demand in the US.

There's one in the works in South Dakota scheduled to start building in 2010 and I guarantee it won't finish on time, 2014, because of envirowhacko groups suing them.

Some examples of EPA fun:

In order to comply with new low sulfur regulations, one WA refinery had to spend ~80 million for a new diesel unit, and ~120 million on a new unit to comply with Cali gas laws. The sulfur limit in diesel was cut from 500 ppm to 15 ppm in 2007. That's a very drastic cut.

Recently, the EPA pulled the permit for a ConocoPhillips refinery project in Wood River, Illinois. The project is costing three and one-half billion dollars, and the EPA shut it down in the middle, thanks to a lawsuit from the "national resource defense council".

The thing is, the current envirowhacko agenda is to prevent use of Canadian oil shale product in the US, being the energy haters they are.

Those same enviro-whackos are now suing the BP refinery in Whiting, Indiana over another huge project.

A chevron refinery in richmond, cali is trying to get a permit to expand, and the city is demanding insane things to allow the permit (like 10% of the refinery power generated by wind and solar, huge cuts in CO2 emissions, dictating the amount of oil that can be run through the refinery, demanding 10 million in bribes for various city projects, etc.)

That's just off the top of my head.

Envirowhackos use EPA regulations to sue anything and everything that refineries try to build, even if the permit has been issued. Heck, in one town nearby a group of liberals has delayed for years the building of a new Wal-Mart by suing the city, and Wal-Mart has to deal with diddly-squat in terms of enviro regulations, relatively.

The EPA, of course, makes newer and more onerous regulations each year, and permits can increase those further. The high cost of compliance and the battle against envirowhackos to get anything approved has been a prime driving force for the shutdown of refineries. It's not really NIMBY's but out of town envirowhacko groups that come in and sue any plan to expand or modernize.

Right now, there are literally a million regulations on a medium sized refinery in the US.

And in the west, almost every state has different - not varying levels of strictness, but different - regulations on what gas sold there must be like. So gas is not a fungible good out here.

CR

[Xiahou]

CR, you look at the article I linked? Your factoids reinforce what they're saying pretty nicely. Refineries are in it for a profit- as they should be. With margins already tight, and billions of dollars in taxes and regulation- plus a hostile congress threatening to nationalize them or, at least, cut their margins even thinner, it just doesn't make much sense for them to invest in US refining.

Here's an article from the Toronto Star that almost makes you feel bad for companies like Exxon(almost). Yeah, they're still fabulously wealthy, but as it stands, the writing is on the wall for Exxon and other publicly traded oil companies. Soon they'll all be replaced by even more corrupt and greedy state-run enterprises.

[Ice]

Excellent article on the subject to be found here. Lots of chewy bits of goodness in the article, but here's a fascinating passage:

Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years. (Business Journalism 201: You can reinvest in manufacturing capacity or ride the demand curve to higher profits.) Studies by Cambridge Energy Research Associates, a respected, oil-friendly consulting firm, indicate that even if all environmental regulations were removed from refinery construction, few would probably be built right away because of a 75 percent rise in construction costs since 2000, largely driven by the increased fuel cost of transporting building materials.

This interests me. I was given to understand that refineries were the crucial bottleneck in our gas/oil system, and that they weren't being built because of NIMBY communities and crazy red tape Federal madness. Why were so many refineries closed? Does anybody have the scoop on this? And please, no left-wing or right-wing crackpot conspiracy sources, if you please. I'd like some facts, if such are to be had.

Investing in a refinery is an expensive and time consuming venture, which most likely takes years to see any profit. That's my guess.

[Marshal Murat]

I just assumed the high prices were caused by increased futures market.



Silly MM, thinking it was simple.

[Gregoshi]

So it is a Battle Royal for who's at fault: Big Bad Oil Companies vs Big Bad Government. How unrefined.

[Lemur]

Well, the laws of supply and demand have a little something to say about price as well. But the general impression I'm getting is that, yeah, the market is broken, and everyone would like to blame someone.

[Sigurd]

This interests me. I was given to understand that refineries were the crucial bottleneck in our gas/oil system

You don't need refineries for petroleum gas. It comes out of the wells in its true form and can be piped directly to the end consumer.

I suspect you are talking about something else. But in the oil world, gas means natural gas as a product.
If you are talking about refined petroleum or petroleum spirit, I don't think the actual refining has too much impact on the price. According to this, the refining only adds a 9% to the final price. The major price indicator is still the crude oil price, which today is around $130 USD a barrel.

If we make a simple calculation:
A barrel of oil is 159 liter. One gallon is around 4 liter (US 3.7l, UK 4.5l ).
That means one liter costs 130/159 = 0.82.
A gallon costs 4*0.82 = $3.3 USD And that is just the crude oil price.

[LittleGrizzly]

One gallon is around 4 liter (US 3.7l, UK 4.5l ).

We have different measurements for a gallon ?... thats odd...

[Sigurd]

One gallon is around 4 liter (US 3.7l, UK 4.5l ).

We have different measurements for a gallon ?... thats odd...

That is not the only units of measurement that you have different...
It makes the world for a programmer a living hell.

[LittleGrizzly]

Well us brits like to be different :)

Seems like a bad idea though, wasn't there a recent mistake on one of the space missions because of difference in measurements ?

[Don Corleone]

It's the Octosquids. They're taking out all the Offshore rigs and refineries, so we'll be fighting amongst ourselves and won't be prepared when they begin Operation Calamari. That, and our stuff, uh won't work, cause our tanks won't have no gas.

[Gregoshi]

Operation Calamari? Then this fuel crisis must be Operation Appetizer. It will all end with Operation Just Deserts...oh dear - I'm hungry now.

[Crazed Rabbit]

Sounds like its time to give a kick in the pants to mother nature with some a-bombs in the ocean. Like dynamite fishing, but even better.

Of course, others have mentioned supply and demand, and that is having the biggest effect in the recent price increases. But the stranglehold on new refineries is hurting, though those effects will take longer.

CR

[seireikhaan]

I just wish we could flash forward technologically 20 years when we won't need gas for cars anymore.

[Lord Winter]

A lot of the problem is India and China developing more and more, and now taking more and more fuel. just blaming the conflicts in the middle east and Oil companies isn't taking the whole picture into effect.

I just wish we could flash forward technologically 20 years when we won't need gas for cars anymore.

Amen to that

[Lemur]

Another take on the refinery issue:

In the past 10 years, refining capacity in the U.S. has increased by about 2 million barrels per day, which is equivalent to about 10 good-sized refineries. Capacity expansions equivalent to 8 more new refineries have been announced for the next 4 years (although some refiners have recently suggested that some expansions may be put on hold as a result of the stated goal of reducing gasoline consumption by 20% in 10 years - in order to avoid an oversupply situation). So while it is true that new refineries aren't being built, it is certainly not true that capacity is stagnant. There are several reasons for expanding existing refineries as opposed to building new ones. [...]

The bottom line on the refinery capacity issue is that yes, refining capacity has been reduced at times. And there were perfectly valid reasons that this happened. It is also true that capacity is short at the moment - if the objective is to maintain sub-$3 gasoline prices. But, reduced investment in refining capacity is indeed a key factor behind the current gasoline price spike.

On the whole, it seems like a knowledgeable and well-balanced essay.

[Marshal Murat]

I don't understand the 'over-supply' problem in 10 years. I think we could start exporting the 'black gold' to African and Asian nations, beginning a new era of American economic imperialism....

[Tribesman]

I don't understand the 'over-supply' problem in 10 years. I think we could start exporting the 'black gold' to African and Asian nations, beginning a new era of American economic imperialism....

Is it because Asian and African nations are jumping ahead with their import/export and refining deals .China and India especialy and Pakistan to a lesser extent , and of course not forgetting that crazy fellow down Caracas way .

[Hosakawa Tito]

Here's an article that may shed some light on the question: So cheap it hurts

Gas price: It's all about government policy. Gasoline costs roughly the same to make no matter where in the world it's produced, according to John Felmy, chief economist for the American Petroleum Institute. The difference in retail costs, he said, is that some governments subsidize gas while others tax it heavily.

[LittleGrizzly]

It mentioned over here on the news some time ago that the price increase is felt more in the USA because it was a smaller amount to start with, i didn't really think how much this lulled people into a false sense of security when it came to buying gas guzzlers.

I also didn't know this
Gas consumption Europe vs. U.S. There is some evidence Europe's high gas taxes have capped its oil consumption.
Oil use in the United Kingdom has basically stayed flat from 1980 to now, while in France it's dropped 17%, according to figures from the Energy Information Administration.
In the United States, meanwhile, oil use is up 21% over the same period, although the country has added more people and seen its economy grow slightly faster.

[Xiahou]

Another take on the refinery issue:

...

On the whole, it seems like a knowledgeable and well-balanced essay.

Interesting to note that the article was written just over one year ago when oil prices were sharply cheaper than they are even now. I think it's a good article overall, but my understanding is that with the current oil prices, margins are slim for refineries- whereas, at least at the time he wrote the article, he said margins were favorable. I wonder where he pegs them now?

Regardless, I have to point out that he completely demolishes the Democrat talking points on the issue of gas prices. They are either completely clueless or shamelessly pandering (or some combination thereof)- either way, they can not be trusted on the issue. I think most Republicans in congress lack a comprehensive understanding of energy markets as well, but at least some of their suggestions might make a difference.

Interestingly, there is a new bipartisan senate "gang of ten" that seem to be leaning towards authorizing new offshore drilling. The compromise is that some of the royalties from the drilling must be used towards alternative energy. In light of the corn ethanol debacle, I'm leary of more government subsidies in alternative energy, but still hoping for the best.

It's certainly better than plans to raise the gas tax.

[Ice]

It's certainly better than plans to raise the gas tax.

Assume the average family burns 40-gallons a week. Raising the 18-cent federal gas tax another dime would cost the average family around 15-20 dollars a month.

I'm not seeing a huge issue here. The 18 cents federal gas tax isn't putative, imho. A 28 cent tax wouldn't bother me.

[Xiahou]

I'm not seeing a huge issue here. The 18 cents federal gas tax isn't putative, imho. A 28 cent tax wouldn't bother me.

I'm glad that a 60% tax hike doesn't bother you. Although, I never had you pegged as being in the "give til it hurts" school of thought when it comes to taxes.

But, we all know they need it judging by how miserly they've been with spending those funds in the past. I mean, it's absolutely critical to our nation's economic infrastructure that the parking lot of my local arena be paved using half a million in federal highway funds.

[LittleGrizzly]

18 cents a gallon is very cheap but when theres already a price hike that some people are struggling with it might not be a good idea, 10 cents a gallon extra really doesn't sound like a lot though....

[Ice]

I'm glad that a 60% tax hike doesn't bother you.

It doesn't bother me when the tax being raised is such a minimal amount. That's like saying "taxes went up 200%, what an outrage"

" what were they and what are they now"

"1 cent to 3 cents"

"uh, ok"

Although, I never had you pegged as being in the "give til it hurts" school of thought when it comes to taxes.

I'm not usually, but a tax on gasoline is used for a very specific purpose; road maintenance, or so I believe. I'd rather pay a minimal 10 cent more a gallon on gas than neglect the nation's highway system.

But, we all know they need it judging by how miserly they've been with spending those funds in the past. I mean, it's absolutely critical to our nation's economic infrastructure that the parking lot of my local arena be paved using half a million in federal highway funds.

Who said there wouldn't be pork? I'd be willing to bet the majority of funds go to worthy projects.

This stems back to the realistic vs idealistic thread. You refusing to pay an extra 10 cents a gallon on gasoline isn't going to make the government spend it funds more efficiently. That would take a major overall. The roads here in Michigan are enough, I'm not going to gamble on something so idiotic as paying a mere 10 cents per gallon more.

18 cents a gallon is very cheap but when theres already a price hike that some people are struggling with it might not be a good idea, 10 cents a gallon extra really doesn't sound like a lot though....

It isn't a lot at all. If it is, good. Sometimes I'd wish they would tax gasoline as much as you Euros do. You would hardly see any SUVS on the road and the could be used to better the road system and build more public transportation.

Wow I'm turning more to center every day here.

[Kralizec]

This stems back to the realistic vs idealistic thread. You refusing to pay an extra 10 cents a gallon on gasoline isn't going to make the government spend it funds more efficiently. That would take a major overall. The roads here in Michigan are enough, I'm not going to gamble on something so idiotic as paying a mere 10 cents per gallon more.



It isn't a lot at all. If it is, good. Sometimes I'd wish they would tax gasoline as much as you Euros do. You would hardly see any SUVS on the road and the could be used to better the road system and build more public transportation.

Wow I'm turning more to center every day here.

I know squat about how much our state spends on infrastructure, but it's bogus that they use every penny collected through gas and verhicle tax on it. Government transparency, gah