Gas Prices and the Refinery Dilemma

Refining woes, not crude, driving US fuel prices

NEW YORK (Reuters) - Record fuel prices in the midst of a U.S. oil supply glut have underscored the growing failure of domestic refiners to keep up with demand in the world's biggest energy consumer.

A crunch in spare refining capacity has left the United States vulnerable to supply disruptions from refinery accidents -- on the rise because of lingering damage from hurricanes and tough environmental regulations -- and bolstered the argument by oil cartel OPEC for keeping supply curbs in place.

As I point out repeatedly, the U.S. consumption of gasoline outgrew our capacity to refine it over 10 years ago. So there is a very thin supply margin. We bridge the gap by importing more and more refined gasoline from Europe. The future does not look very rosy either.

Refiners are also struggling to meet new greener U.S. specifications that require highly specialized processors to make fuel, analysts said.

"Having less latitude with very tight product specifications means that process glitches that would have been resolved without much trouble in the past, are causing big production losses," Jan Stuart, economist for UBS Securities LLC, said in a research note.

While no new refinery has been built in the United States since 1976, industry groups say companies have added the equivalent of a new refinery in additional capacity to existing U.S. plants each year for more than a decade.

But they warn that new U.S. government efforts to cut gasoline use by 20 percent by 2017 using renewable fuels may cause companies to scrap future expansion plans despite historic profits in recent years, tightening the refining market further."

You would not be very eager to invest hundreds of million so dollars in new refineries if the government was passing legislation to cut the consumption of your product, either.

Talk about your paradox of unintended consequences.