The Speaker

It is better to be silent and thought a fool, than to speak and remove all doubt

"...Speaking of the Hurricane season, renewed attention has been brought to the way we refine gasoline in this country. Today, energy companies started reporting their 3rd quarter earnings, and while Americans paying were record prices at the pump, energy companies were making record profits.

This is America. And Republicans don’t believe in punishing success. But what are these oil companies doing to bring down the cost of oil and natural gas? They haven't built a refinery here in America since the 1970's. They've built refineries overseas, but nothing here at home.

We want some answers and you folks out there in the blogosphere do too. When are new refineries going to be built here in America?..." --- Denny Hastert

Of Possible Interest to the Commenters from TCS

"Dan, Speaker of the House Dennis Hastert today said that he wanted to pass a law that required oil companies to reinvest their profits in increasing refinery capacity in the United States. What would the impact of increasing refinery capacity in the United States be?

Dan Yergin: There is a tendency to think that the refining problem is a U.S. problem, that we don't have enough refining capacity. The problem is a global one and it is really more concentrated in Europe and in Asia and we are feeling the impact of it. In Europe, half the new cars sold are diesel and they don't have enough of what is called conversion capacity in the refineries to turn out that fuel and there is also rising demand in China for that type of fuel. So that's what really put the pressure on the refining system. In the United States we could certainly use expanded capacity to process difficult crudes, although we are kind of the world leader in that as it is.
..."

Share this

Um, I don't know the answer

Um, I don't know the answer to this, so lump me in with Hastert. Could somebody explain. Why haven't they built one? Or is that not the point?

I am guessing the answer is

I am guessing the answer is some sort of regulatory obstacle, but could you elaborate Don?

1) The increased demand for

1) The increased demand for diesel fuel for cars in Europe means that European refineries produce excess gasoline which is then shipped to the USA. (Why on earth do you chaps not buy more diesel cars, by the way?)
2) A friend who worked for BP until recently told me that regulatory obstacles are only part of it: the companies also look on refineries as insufficiently profitable. Whether that is a result of real economics or of accounting conventions I don't know. (The latter is perhaps unlikely?)

There are plans by Arizona

There are plans by Arizona Clean Fuels to build a refinery in Arizona 40 miles east of Yuma. It has been in the works for years to clear regulatory hurdles, most of which have now been cleared.

http://www.greencarcongress.com/2005/03/epa_approves_dr.html

Also see

Also see http://www.arizonacleanfuels.com/refinery.htm

dearieme, You probably

dearieme,
You probably don't get quite the return on investment when you know you're going to have to go through years of wrangling with NIMBY's, countless "environmental impact studies", and then still know that your project could get killed by bureaucratic whim at the drop of a hat. The fact that Hastert tried to reach out and attack the gas makers instead of the government that effectively stops any refinery from being built in this country is what Don was pointing out, IMHO.

And why doesn't Denny have comments on his little blog there... Afraid too many of us might give him a piece of our mind?

Hastert's string of

Hastert's string of statements and questions implies that if we built refineries in the US, then the price of oil would go down. But he hasn't demonstrated any such connection, merely assumed it.

Furthermore, if building refineries in the US would lower prices, then it would do so by first lowering the cost. And profit-driven companies are all about lowering cost. By asking the question in the way he does he implies that companies are greedily seeking greater profitability at the expense of the customer, but by simultaneously implying that building refineries would lower costs, Hastert is implying that these same greedy profit-driven companies are trying to lower their own profits by raising their own costs.

In short, Hastert is not making sense.

dearieme; A couple of

dearieme;

A couple of reasons why we don't buy diesels. One is the reputation they got in the 70s, when Oldsmobile and VW both sold cars that were underpowered and smoky. The other is the California Air Resources Board's adamant opposition to diesel. On one of the biodiesel blogs, I read about someone setting up a successful business on trading used diesels for the California market. Since several other states base their standards directly on CARB, they effectively restrict diesels in other states, too.

Some of the opposition is due to the sulfur content of diesel, but most of the opposition has to do with the particulates (PM10, or 10 micron known as "soot" that gets trapped in your nose and throat), even though they are less dangerous than gas emissions (PM1, or 1 micron particles that make it all the way to your lungs where they are more dangerous). They apparently haven't figured out that they can get 40% more performance per gallon in a diesel, or that they can run on sulfur-free biodiesel.

So far, I've driven a VW Golf TDI (mine) and a Seat turbodiesel in Spain. Plenty peppy, not noisy, not smokey (except at the initial startup on cold mornings and really hard accelerations while still cold).

All -- Tech Central Station

All -- Tech Central Station reference added to body

Regards, Don

One comment about investment

One comment about investment in refining facilities. It only makes sense if you think there will be significant increases in oil consumption (or your depreciated plants are actually wearing out). If as a refiner/oil company you believe that current production is largely limited to ~2% growth (even at barrel prices which are above $50 even outside of the spot market), which appears fairly reasonable for the next year, then there's not much upside in your 10% margin.

Longer term, and most of these investment decisions are fairly long term, the price rise was not predicted and excess capacity wasn't invested in. Could it be that oil companies don't actually think that production can increase much, or are there other confounding factors? If there are shifts in refining fractions, then that may create a delay in capacity, under-utilization, and reduced margins due to lost efficiency. There has also reportedly been a large increase in the use of lower quality crudes (anecdotal), and certainly a rising price differential.
http://www.econbrowser.com/archives/2005/08/sweet_and_sour.html

The idea of peaking oil production has all sorts of strange implications. This is especially true in a market with highly asymmetric information, as the small number of price setting producers have far more knowledge of the actual reserves, future capacity, and growth in capacity, than do the very distributed consumers. The shift in crude selection may be a signal, and makes me wonder if the reason there isn't new capacity is because the refiners figure they just don't need it, or won't for long enough to recoup the investment. The market will correct the demand/supply balance in a variety of short term ways, but longer term it will be human speculation, and neither need lead to pleasant consequences, nor to broadly efficient investment.

kurth, Good points. The idea

kurth,

Good points.

The idea of peaking oil production has all sorts of strange implications. This is especially true in a market with highly asymmetric information, as the small number of price setting producers have far more knowledge of the actual reserves, future capacity, and growth in capacity, than do the very distributed consumers. The shift in crude selection may be a signal, and makes me wonder if the reason there isn’t new capacity is because the refiners figure they just don’t need it, or won’t for long enough to recoup the investment. The market will correct the demand/supply balance in a variety of short term ways, but longer term it will be human speculation, and neither need lead to pleasant consequences, nor to broadly efficient investment.

I wonder if further investments in natural gas conversion and distribution won't make more sense if crude prices stay relatively high. Further capacity enhancements of existing refineries might still be possible, but it's hard to imagine that existing refinery owners have much to gain from building new ones.

Regards, Don

This is a minor nitpick, but

This is a minor nitpick, but one of the only two entries at the speaker's blog says productivity rose 3.8% in the third quarter, when what he means is it rose 0.95%.