In a way, it would be nice if all the outraged motorists in Canada and the United States were right, and there was a conspiracy on the part of OPEC and the oil companies to drive gasoline prices into the stratosphere.
The reality is more complicated, and harder to solve. Tight oil supplies and rising demand from China are only part of the story. One of the biggest bottlenecks in the industry - and one the conspiracy theorists often overlook — is the lack of refining capacity in Canada and the U.S. And that is a problem which can't be overcome quickly or easily.
According to the U.S. Energy Department, refining capacity in the United States has grown by just 2.4 per cent since 1977, while demand for gasoline has risen by 27 per cent in the same period — thanks in part to the demand for gas-guzzling trucks and SUVs. "There is plenty of oil on world markets," ConocoPhillips chief executive officer James Mulva said recently. "It's a question of limited refining capacity." Legendary Texas oilman and takeover artist T. Boone Pickens made the same point recently, saying he expects gasoline could head north of $3 a gallon in the United States soon.
Some drivers may picture the gas market as a big black hose stretching from Texas or Saudi Arabia straight into the gas tank of their Cadillac Escalade, but there is an intermediate step, in which it has to be refined and turned into various kinds of fuel such as diesel, unleaded or high-octane gas, and so on. On the outskirts of towns in Alberta, Texas and California you can see these refineries - they look like massive steel replicas of some alien creature's digestive tract, covering several square miles and belching smoke.
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The cruel fact is that no major new oil refineries have been built in the United States or Canada since the early 1980s, and many of the ones that used to exist have been shut down — hundreds of them over the last 10 to 15 years, in fact. That has left the continent's existing refineries stretched for capacity, just as North American gasoline markets are heading into the heavy-demand summer driving season. According to one estimate, U.S. refineries are running at about 97 per cent capacity.
The gas-price conspiracy theorists like to argue that the big oil companies deliberately closed down all those refineries in an attempt to drive gas prices higher, but it's not that simple. It's true that consolidation in both the upstream (or oil-producing) part of the market and the downstream (or refining and marketing) part has led to fewer and fewer players, and most of the majors have closed dozens of refineries during that time. But much of that was driven by the horrendously low margins in the downstream segment, margins which drove many independents under.
Those margins have improved considerably in recent months, obviously. Oil industry critics point out that refining profits at majors such as ExxonMobil, Royal Dutch/Shell and ChevronTexaco were up as much as 294 per cent this year over last. For much of the past decade, however, refining margins have been barely over the mid-single digits according to some estimates — in large part because of the growing cost of expanding and upgrading refineries. Integrated oil companies such as Exxon have been far more interested in selling their crude and natural gas than in chasing refinery profits.
In fact, many of the refineries that disappeared in the past 20 years were closed because it would have been too expensive to upgrade them to meet new environmental rules. It's not a coincidence that no new refineries have been built since the U.S. Environmental Protection Agency brought in its Clean Air regulations, which placed limits on emissions from refineries. The problem has gotten even worse recently with requirements for low-sulphur blends of gasoline. Refineries have had to upgrade in order to produce the new blends, and that has also reduced their capacity (since not as much new gas can be made from a barrel of oil).
Canadian refineries run by companies such as Irving Oil, Husky and Petro-Canada have upgraded to meet the new requirements, although some have also closed older plants because they would be too expensive to upgrade, such as the Petro-Can refinery in Oakville. But they have not been able to boost production enough to keep up with growing demand, nor have their U.S. counterparts. Meanwhile, some offshore refiners such as Russia - who used to be able to fill the gaps in U.S. demand when markets got tight — have balked at upgrading their operations and that has tightened the supply picture even further.
So why not just build some new refineries? Saudi Arabia's oil minister Ali Al-Naimi recently offered to build and operate two 500,000 barrel a day refineries in the U.S. The problem is that just meeting the various local, state and federal environmental and planning requirements for a new refinery could cost as much as $100-million, according to some estimates — if a site could even be found. And even once the permits were acquired, a U.S. Senate committee recently estimated the cost to build a new refinery at $2.5-billion over five to seven years.
In other words, high gas prices could be here to stay — unless, of course, people suddenly decide to use less.
E-mail Mathew Ingram at mingram@globeandmail.ca
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