Outside Editorial: Big Oil needs to expand nation's refining capacity

Posted: Tuesday, June 12, 2007

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Those who want to engage in finger-pointing should be prepared to use multiple digits.

Collective castigation of the world's steadily expanding population of 6.6 billion people is a possibility, because global oil and gasoline demand are at record levels despite spiraling fuel prices. Demand is exploding in fast-growing nations such as China and India, where many people are buying cars for the first time.

Or wrath could be narrowly focused on U.S. motorists. America is by far the world's largest gasoline consumer. Americans are burning slightly more fuel than they did a year ago, and many still are driving gas guzzlers, even though the average U.S. pump price recently hit record levels exceeding $3.20 a gallon before settling just under $3.16 for the week that ended Sunday.

Rage could be directed at Washington, because the Bush administration and Congress have yet to adopt a substantial, comprehensive, mandatory increase in fuel economy standards for passenger vehicles.

Oil traders and hedge fund operators who are accused of driving up gasoline prices and making energy markets more volatile as a result of their speculative actions can inspire ire.

Or simply chastise Big Oil for being greedy and ... well, just too darned big. The petroleum industry, led by Exxon Mobil, has been enjoying exceptionally high profits, especially in the refining sector. But the industry appears reluctant to pour a sizable chunk of its record earnings into building refineries or expanding existing ones. Although U.S. refining capacity has grown moderately in the past 15 years as a result of plant expansions, no new U.S. refinery has been built in 30 years.

America imports more than 60 percent of its oil and is importing increasingly larger volumes of gasoline, even though U.S. gasoline production is at a record-high level of about 8.85 million gallons a day, according to a May 24 article in The New York Times. National governments, rather than private energy companies, own and control the majority of the world's oil production and reserves.

Giant U.S. oil companies have some understandable reluctance to plow record profits into new or expanded refineries. The refining sector posted poor earnings for years after the catastrophic mid-1980s oil bust, and industry veterans have long memories.

In the past decade, U.S. refineries have spent $50 billion on meeting higher anti-pollution and clean-fuel standards, according to the American Petroleum Institute. That's enough money to build 10 or more refineries.

A new refinery might cost $3 billion to $5 billion and take five years or more for permitting, design and construction. Intense NIMBY ("not-in-my-backyard") opposition can be expected for virtually any proposed refinery and for many plant expansions. By the time that a refinery were built, or an existing one expanded, gasoline demand could have declined and fuel prices tumbled as a result of new fuel economy standards being adopted, an economic recession, growing reliance on alternative fuels or a combination of those factors.

The National Petrochemical and Refiners Association says the industry is more reluctant to put billions of dollars into expanding refinery capacity because President Bush has proposed to cut U.S. gasoline consumption by 20 percent by 2020 by escalating reliance on ethanol and other alternative fuels.

Those are legitimate concerns, but America's refinery capacity has been stretched tight by rising gasoline demand and some refineries being partially shut down for maintenance or problems such as fires. Given the hefty profits it is enjoying, the oil industry should be willing to boost refinery capacity, an investment that could pay off handsomely in the long term. Instead, some companies seem far more interested in pumping profits into huge buybacks of shares of their own stock.

Although Exxon Mobil is reluctant to put money into new U.S. refineries, it is partnering with Chinese and Saudi Arabian companies to build a refinery in China, BusinessWeek reported in its May 28 issue. Is the United States, historically the world's largest petroleum refiner, increasingly going to be outsourcing its refining capability to foreign countries? That's a troubling thought, particularly in terms of diminishing our energy security.

Congress, in response to constituents enraged by high fuel prices, is considering largely meaningless measures such as imposing stiff penalties for gasoline price "gouging," which isn't widespread. It's very hard to legally define "gouging," much less successfully prosecute anyone for it. Congress instead should focus on adopting appreciably higher fuel economy standards.

If Big Oil wants to improve its tattered public image, stave off punitive actions by Congress and boost America's energy security, it should substantially expand the nation's refining capacity. Thanks to American motorists who have been emptying their wallets at the pumps, the industry has ample cash on hand to make such an investment.

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