http://money.cnn.com/2005/09/22/news/economy/rita_threat/


They’re once again talking about $5 per gallon gasoline. There’s more to the whole story though that isn’t getting told about why there are so few refineries that are stretched so thin that taking one or two of them out causes such a price spike.

Right now, the majority of the time all of the active refineries in the country are running near full production just to keep up with the country’s gasoline needs. Periodically these plants have to be shut down to be maintained. We see a small price spike every time a refinery is taken out of service for it’s periodic required maintenance. There’s also unplanned maintenance that happens because refineries are big, complex pieces of machinery that can and will have pieces break down. Because of this we really should have enough refineries that we are not running them at more than about 75% at all times. If you do this, then the plants running at partial capacity can compensate when a plant is taken out of action due to flooding, hurricane damage, broken parts, and even routine maintenance.

(The numbers in the below section have lots of ballpark figures. Any refinement you can give me on them to get more accurate data would be appreciated.)

The problem is that, like Nuclear plants, we haven’t built a new refinery since the 70’s in the US. (This information from people working in the oil/gas industry. I need to track down some additional sources for this.) Because of all the government environmental regulations a new refinery could cost upwards of 10 billion dollars to construct. Because of the huge investment required, a refinery simply can’t make back the money it costs to build one. Between all of the refineries in american and all of the sales of gasoline, only 320,000,000 gallons gas/day are consumed ( http://www.gravmag.com/oil.html ). If there are 170 refineries ( Link dead ) this means that each one is only selling about 1.9 million gallons per day. If they make a dollar profit per gallon (which is a very high estimate of what they actually make) and we don’t count paying their employees it would take at least 15 years for the plant to start making a profit. This also doesn’t count paying their upstream suppliers and the cost of actually transporting it to the gas to the point of sales.

Environmental regulations also hurt in the distribution side. There are something like 40 different varieties of fuel being used across the country. Mostly slight reformulations with ethanol or oxidizers specific to a certain region of the country. These have been relaxed recently but were driving up the cost of fuel and making it difficult for us to use foreign gasoline in our distribution system. Even cutting this in half for the long term would drop the overall price of gas due to economies of scale. If we could get some cities with very slightly different formulations to agree on common gasoline standards to use, we could eliminate many of these without significant environmental impact.

A final thing that environmentalism has done to increase costs, although it’s not really affecting us yet given that it’s a refining bottleneck rather than a crude oil bottleneck is the restrictions they’re placing on drilling. No, not in ANWR. Off the coast of California and Florida. Typical California though, expecting everyone to give them everything without giving anything tangible back.