Oil refinery boom skips U.S.

Investment shifts overseas

domestic community resistance and regulations blamed

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May 31, 2007|By Kevin G. Hall | Kevin G. Hall,McClatchy-Tribune

WASHINGTON -- With gasoline prices averaging $3.21 for a gallon of regular nationwide over the Memorial Day weekend, traditional economic logic might suggest that this would be a good time to invest in new U.S. oil refineries and increase the supply of gasoline.

Yet no new refinery has been built in the United States in three decades, only one is in the works and oil companies are scaling back planned investments in new, expanded or modernized U.S. refineries rather than increasing them.

But overseas - where it's generally cheaper, faster and easier to build oil refineries - a boom in construction is under way to meet the growing demand for gasoline in the United States and in big developing countries such as China and India.

That means that Americans increasingly will be filling their tanks with imported gasoline.

In 2005, imported liquid fuels - mostly oil and an increasing amount of gasoline - accounted for about 60 percent of U.S. consumption, according to the Energy Information Administration, the statistical arm of the Energy Department. In a long-term assessment this month, the EIA said that figure could grow to 67 percent by 2030.

"We are outsourcing refining," said Severin Borenstein, an economist and energy expert at the University of California in Berkeley.

"I think that this is primarily because of community resistance ... people don't want to live by refineries, but they still want the gasoline," Borenstein said.

Refineries are being built in Saudi Arabia, India and China. For Saudi Arabia, the world's leading oil producer, tight refining capacity amounts to a brake on its oil sales.

India and other developing nations are building refineries to serve both their growing domestic markets and the increasing demand for gasoline in China, which by 2020 is projected to have as many cars as the United States does.

In 1970, global refining capacity was about 47 million barrels per day. Today it's about 83.5 million barrels per day, but only 17.5 million of them are refined in the United States.

The Paris-based International Energy Agency projected last year that the world's refining capacity will have to grow to 93 million barrels per day in 2010 and to 118 million by 2030 to meet demand.

The growth of global refining capacity will determine whether gasoline prices moderate, stay high or rise even higher. Many energy experts think that crude oil may be more available by 2010, but more barrels of oil won't help reduce prices unless there's more refining capacity to turn it into gasoline.

Congress passed legislation in 2005 to streamline the permitting process, hoping to encourage new investment in U.S. refineries. President Bush offered military bases to house them. Yet only one new U.S. refinery is planned, in Arizona, and it's been in the works for a decade.

"There are just a vast number of barriers for a startup oil refinery in the United States," said Ian Calkins, a spokesman for the Arizona Clean Fuels Yuma project, which has faced environmental and community hurdles and now a lawsuit over former American Indians tribal lands.

The $3.5 billion refinery, planned 100 miles southwest of Phoenix, would process a modest 150,000 barrels of oil a day when it comes online in 2011. Still, investors must be found who are willing to plunk billions into a project that offers only long-term returns.

"It's almost a nonstarter to the vast majority of investors," Calkins said.

The cost of meeting state and federal regulations also drives refinery expansion overseas.

The American Petroleum Institute, which lobbies for the oil industry, said its members had spent $50 billion over the past decade to comply with environmental, safety and other regulations - about the cost of building 10 big refineries.

"Environmental regulations ... play a large role in restricting the development of new refining capacity and the loss of some existing capacity," said Robert Dauffenbach, an economist and associate dean of the University of Oklahoma's Price College of Business.

Bush's goal of a 20 percent reduction in gasoline use by 2020 also has U.S. refiners scaling back investment plans from $1.8 billion over the next five years to about $1 billion.

"Should I make billions of dollars in new investments that are going to be stranded 10 years down the road?" asked Bill Holbrook, a spokesman for the National Petrochemical and Refiners Association.

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