Refining: the Untold Story of the Oil Chain
Hurricane season brings
more media references to refining capacity, but little explanation
of this force behind gas prices.
By Amy Menefee [1]
August 31, 2005
It took the force of
Hurricane Katrina to wake up the media to a big story: U.S. oil
refining.
Following a summer of relentless gas price coverage, the storms
threat to refineries in the Gulf of Mexico added urgency to reports
about the oil industry. But only one network news story in three
months of summer coverage has attempted to explain the role of U.S.
oil refining in the nations gasoline supply. Instead, networks have
made passing references to the causes behind pricing and have
criticized the free market.
One way the networks addressed refining was to hype the profits oil
companies were gaining from higher prices. As NBCs Katie Couric
said on the August 17 Today, As we pay through the nose, someone
has to be smelling some pretty big profits.
Likewise, the August 11 World News Tonight pounded the oil market
for making a profit. ABCs David Muir asked, But are any of those
increasing profits, both overseas and at home, being spent to fix
those refineries or to help solve the shrinking U.S. gas supply?
Mike Rothman, an oil industry analyst, replied: There has in fact
been an increase in investment, both for production of oil as well
as refining. But the impact of those is not immediate. Muir
responded as if he had not heard what Rothman said, continuing his
attack: But analysts say theyve yet to see any improvement. And
oil companies are busy spending billions in their profits
reinvesting in themselves. Muir didnt look into how much of that
reinvesting went to compliance costs for regulations on the
industry.
Reporters frequently cited a decline in capacity as a reason for
higher gas prices, but they rarely expanded on that point. ABusiness & Media Institute analysis of summer news coverage (June 1-August 29)
on ABC, CBS and NBC turned up 983 mentions for oil or gas. Networks
have repeatedly covered growing energy demands and even cited
record high prices for both commodities, sometimes several times
in one day. Of the 983, only about 4 percent (38 stories) discussed
refineries, and more than a third of those stories related to
hurricane threats in the Gulf.
Refining the Coverage
Prices have risen because demand has increased, stretching the
refineries near capacity. Yet, the Cato Institutes Jerry Taylor and
Peter Van Doren have pointed out that profit margins in the
refining business have traditionally been rather meager.
Taylor, Catos director of natural resource studies, said much news
coverage has overlooked the fact that crude oil and gasoline are two
different markets. Sometimes the two prices move together, he said,
but not always. Supply and demand arent always reported correctly,
either.
If anything, a loss of refining capacity, if not made up from other
sources, would lead to a net reduction in demand for crude oil,
Taylor said. When refineries the consumers of crude oil demand
less, the price of crude should go down.
But gasoline and oil prices have been climbing lately, and that has
raised questions about what could be done to lower consumers costs.
ABC was the only network that told more of the story behind refining
in America. World News Tonight on August 16 took A Closer Look
at the decline of U.S. refining capacity. Betsy Starks report
included a word with Glenn McGinnis, who has been working to launch
a new refinery in Arizona. Stark pointed out that Its taken five
years to get the air quality permits. The site had to be moved from
Phoenix to Yuma for environmental reasons. And after a decade of
planning, they still havent broken ground.
Stark reported the strain on the 149 refineries in the United
States, saying that months of operating at nearly full throttle, of
trying to satisfy record demand, has produced a summer of fires,
accidents and shutdowns. While those arent the only reasons for
rising gasoline prices, it was a rare network attempt to report on
the reasons behind the news, rather than simply hyping consumers
higher costs.
As Stark said, environmental regulations are a hindrance to building
new refineries, but also to utilizing existing ones. The National
Petrochemical and Refiners Association has reported that an
extensive overlay or intricate and changing environmental
regulations has had a direct impact on product yield and ultimately
supply.
Catos Jerry Taylor has written extensively on energy issues. His
co-author for a June 4 piece on refining was Regulation magazine
editor Peter Van Doren, who did his dissertation on energy markets.
Taylor and Van Doren said it costs far less to expand production
capacity at existing plants than it does to expand capacity by
building new plants. They attributed the decline in the sheer
number of U.S. refineries to government subsidies that ended around
1980, just four years after the last refinery was built.
So should more refineries be built? The real question is are there
profit opportunities and that depends on who you ask, Taylor
said. Its not up to you and me. Its up to people who are
investing billions of dollars. People arent going to invest in the
refining business to make me happy.
Resources:
National
Petrochemical and Refiners Association [2]
American Petroleum Institute [3]
High
Pump-Price Fairy Tales by Peter Van Doren and Jerry Taylor [4]