September 15, 2005

Inviting a More Balanced Debate About America's Energy Policy

I wrote the words in this posting in response to Steve Laffey's criticisms last week of the oil industry. It was originally part of an extended entry, which did not give the policy issues sufficient visibility. As a result, I am re-posting the portion on energy issues below, with some minor modifications, and deleting them from the original posting:

I have been away from the oil industry for a long time now. My specific work experience in the industry included working in the Energy Department of The Morgan Bank in the summer of 1980, working for Aramco in Saudi Arabia during the summer of 1981, and working for ARCO during 1981-83 where, among other things, I had the privilege of playing a meaningful role in a $100 million joint venture financing of the Kuparuk pipeline on the North Slope of Alaska.

When I was at ARCO, we were one of the leading companies at the time in exploring alternative energy, including solar. If there was a chance to make profits in alternative energy, ARCO and the other oil companies would have been all over the opportunities. But it never happened - and oil was priced around $40/barrel back then in the early 1980's.

If there were new technologies that could really create new profitable sources of energy, then the investment community or the oil companies would have funded them. Ask someone how many billions of dollars Union Oil invested - and lost - in oil shale technology years ago. At $60-70/barrel, that funding may now open up and that would be a positive benefit of the higher oil prices. It certainly would be a more efficient way to develop new resources than having a bunch of Senators pass legislation that they then hand off to nameless bureaucrats to regulate from Washington, D.C. Consider this example of what they have already done to us in the past.

My point is that we do need to deal with energy issues but simply blaming the oil companies is a shallow and tired argument. I list a series of questions throughout the rest of this posting on energy issues. I don't agree with pursuing all of the answers to those questions but politicians will only be taken seriously when they show the courage to tackle many of the questions. Citizens also cannot complain about $3/gallon gas and then be stridently opposed to pursuing changes to the status quo. (And this posting is not about excusing unreasonable Big Government or Big Business actions such as this latest Tom DeLay story.)

An earlier posting entitled The Geopoliticization of World's Oil & Gas Industry points out that there are geopolitical trends in energy that are beyond the power of the oil companies to control and adversely affect oil prices: can't be said that the free play of supply and demand ever set prices in the oil market. But we are now seeing an even more profound uncoupling of the oil industry from anything resembling the model characteristics of market economies. Governments rather than traditional commercial enterprises are increasingly taking control. And those governments often have interests quite hostile to ours...

Russia and China are using state-owned companies that are not bound to profit-maximize to achieve their long-term goal of weaving a web of relationships that will stand them in good stead in any diplomatic confrontation with the United States. Whether America can continue to rely on its private sector to provide us with comparable clout is no longer certain. After all, when companies that have to maximize profits compete with companies that seek to maximize national influence and power, the latter will engage in projects that the former simply cannot...

Note in that article how Saudi Arabia, Iran, Venezuela, China, and Russia are all using oil as a de-facto weapon in international relations.

Also beyond the control of the oil companies is the increasing demand for energy products by booming economies in China and India and how their increased demand has tightened the supply of oil available for the rest of the world - and further raise oil prices.

If oil supplies are so tight, is anyone willing to expand domestic oil exploration efforts or build new nuclear power plants?

The tightness on the supply side is further explained in this Washington Times editorial which notes the ongoing and increasing shortfall in refining capacity, with the resulting impact on prices:

The fact that gasoline prices have soared while crude oil prices have stabilized strongly suggests that today's bottleneck in the evolving energy crisis has less to do with the total supply of crude oil and much more to do with current refining capacity. The petroleum reserve could be emptied; but if refinery capacity is not available to process the crude into gasoline, diesel, jet fuel, heating oil and other petroleum products, then the extra crude emptied onto the market will have little impact on the ultimate price of gasoline and other fuels...

U.S. refineries have become increasingly temperamental because they have been around for a very long time. In fact, we haven't built a new refinery in more than 25 years. Yes, existing refineries have undergone significant expansion over the years as others have been shuttered, but many of them are more than 30 years old...

Beyond more frequent breakdowns and fires, America's pre-Katrina refinery problem was further apparent from the rising level of refined petroleum products that have been imported in recent years. Since 1995, imported petroleum products have nearly doubled, rising from 1.6 million barrels per day to more than 3.1 million for the first half of 2005...

As long as America continues to consume 25 percent of the world's oil, the least we can do is become self-sufficient in refining it.

Is anyone willing to build new refineries here in America?

Another article says:

We all know that the last new refinery in the US was built in 1976, and that many small refiners are forced to shutdown because capital improvements are not economic given RFG requirements.

This is partly due to NIMBY in the US, and is exacerbated by the patchwork RFG requirements and boutique gasolines: if there was a standard blend, we could simply buy more gas from refineries in places like the Virgin Islands, Dominican Republic, Jamaica and (in the near future) Cuba. We wouldn't necessarily need new refineries on mainland US soil - but the boutique fuels make such projects more risky than they otherwise would be.

Reducing the number of blends required would ease short-term local spikes caused by localized refinery and pipeline outages (which will happen, random as they might be), and would encourage more refinery construction in the Caribbean, which would add some excess capacity (which is currently zero in the summer), thus dampening non-localized (nationwide) summer supply crunches.

Is anyone willing to build new refineries in their home state? Is anyone willing to eliminate boutique gasolines, which were often done in pursuit of lessening environmental emissions?

Yet another article states:

...major factors that determine pump prices, such as the cost of crude oil, are not under the direct control of Congress. Oil industry lobbyists have been pressing Congress to take action on one issue they claim Congress could have some influence over: the capacity of the United States to refine crude oil. Even if the cost of crude oil falls and other factors affecting gas prices improve, the U.S. cannot increase its ability to refine crude oil into gas that can fuel the nation's cars, trucks, jets, and heaters, unless new refineries are built or existing ones are expanded. Industry representatives have been asking Congress to help increase the economic viability of the refining industry by changing and simplifying environmental regulations. Industry critics, however, argue that energy companies actually benefit from tight refinery capacity and that environmental regulations are not a major cause of current energy problems.

The United States currently has 149 refineries producing 16.9 billion barrels-84 percent of U.S. consumption- per day. No new refineries have been built since 1976, and over 170 have stopped operating since then. Many refineries are operating at over 95 percent capacity, which can be harmful to facilities and reduce the flexibility of the industry.The geography of refining facilities and transportation routes also poses challenges to energy supplies...

EIA has reported that tight refinery capacity contributes to price volatility, while its effects on actual prices are negligible. However, EIA does contend that U.S. refining capacity will need to be expanded in order to keep pace with growing gasoline demand. Refining industry representatives often argue that complicated, stringent environmental regulations and an inefficient permitting process imposed on refineries are largely responsible for the high cost of doing business, leading to tight refinery capacity.

Industry officials argue that the cost of refining could be lowered, and that increased refining capacity is necessary for the long-term energy independence of the U.S. They claim that simplifying environmental regulations will lead to an increase in the number of refineries that are built because of decrease in the cost of refining, which will ultimately lead to lower gas prices for consumers. If oil consumption continues to rise in the U.S., the nation will have to import increased amounts of expensive refined oil rather than refine it at home.

According to the American Petroleum Institute (API), a medium size refinery may need to comply with a half a million federal environmental requirements each year in addition to local and state regulations. There are at least fifty federal air programs that apply to refineries including the New Source Review of the Clean Air Act. Regulations affect emissions of pollutants such as nitrogen oxides, sulfur dioxide, particulates, volatile organic compounds, and benzene. API reports that in 2002, refinery operators had about $5.4 billion in environmental expenditures, defined as costs that would not have been incurred if environmental issues had not been considered by the industry. Industry lobbyists say that the complicated network of regulations, coupled with an extensive permitting process, causes potential investors to choose to put their money other places, and this is why no new refineries have been built in nearly thirty years... noted by Senator Jeff Bingaman (DNM), there is no "silver bullet" that will solve the problem of high gas prices. There is no doubt that refining companies spend billions to comply with environmental regulations. Whether the regulations are the cause of tight refining capacity depends on who is consulted. If the cost of refining could somehow be reduced, it is uncertain whether savings of energy companies will necessarily fall back into the pockets of consumers.

Is anyone willing to lessen environmental requirements for US-based refineries?

While America dithers on adding refining capacity, Saudi Arabia is responding to market conditions:

...Saudi Arabia is responding to calls for refinery capacity increases with a multi-billion dollar investment programme. As well as its status as the biggest oil producer in the region, Saudi Arabia also ranks as the largest refiner in the Middle East and is a growing exporter of refined products particularly liquefied petroleum gas and naphtha. Multi-billion dollar refinery expansions will make this growing capacity increasingly important to global oil markets.

Apart from rising oil prices global energy markets are also facing a shortage of refined products due to an almost total embargo on new refineries in the US and Europe because of strict environmental rules. Pressures have increased due to the year on year increase in world demands for oil especially from China and India...

Over the last two decades, Saudi Aramco has developed from principally an oil and gas producer to an integrated company with significant refining, shipping and distribution assets. The process has been led through a diversification and integration of operations via strategic joint venture alliances with leading refining and marketing companies in a variety of markets.

As a result, the company is a major participant in four refining and marketing joint ventures located outside the Kingdom...

The article also talks about how China is the world's second largest importer and Saudi Arabia is their main foreign oil supplier.

This graph highlights the tightness of worldwide refining capacity.

For a more indepth and complete report, go here for information on the demand for petroleum products, refining capacity, effects of product specifications. The report reinforces how worldwide demand is growing, there is a shift toward lighter products, concern over environmental considerations - especially sulfur - has spread worldwide, excess refining capacity worldwide has essentially disappeared and there will be a need for significant new refineries, building new refineries takes years, reduced sulfur requirements has increased competition and price premiums for sweet crude oil as well as changes to refinery processing equipment, and how tighter product specs in the US will make it more economic to ship oil products to the Far East instead of the US.

We cannot complain about prices or our lack of energy independence unless we have first agreed to make the hard choices necessary to increase our available supply of energy resources or gain our independence as a country.

Instead of simplistically blaming the oil industry, true leaders would engage in a reasoned and substantive public debate about the various alternatives so support can begin to coalesce around choices which represent an informed consensus for our society.