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Considering the why of high gas prices

A list of why gasoline is costing so much is a litany of every increasing length. First we can round up the usual suspects including, but not limited to, increasing gasoline consumption, too many fuel inefficient cars on the road, commuting longer distances to work, monetary policy and the greed of foreign crude oil exporters. We can even add to the list the seasons hurricanes that disrupted crude oil deliveries. There are a lot of “wild cards” in the gasoline pricing watch, but a key factor rarely brought up is a real shortage of domestic refining capacity.

The “why” of that domestic refining capacity shortage is another complex maze. In 1981, there were 324 U.S. refineries. Today there are 149 U.S. refineries. There have been some incremental refinery expansions and “fix me ups.” A large desulfurization unit expansion is now underway at a refinery in the Panhandle of Texas. The U.S. now produces the cleanest burning gasoline in the world and 65 different blends of that cleaner gasoline.

The need for desulfurization expansion speaks to environmental issues. Environmental groups have fought every proposed new refinery construction and so far have won. It is easy enough to give in to environmental concerns when the refiners would have to invest about $2 billion for a new plant once permitting was if place. To get the revenue to justify a new refinery would take a refining margin of $9-$10 a barrel of crude oil. Refining margins over the past 5 to 10 years have been about $4 a barrel. As the cost of crude oil goes up, that gap starts to close and it may become profitable to build a new refinery.

The lack of profit margin in building a new U.S. refinery can be coupled with the fact that there are no government policies to provide any incentives to build a new refinery. We can acknowledge that refining capacity is tight and refiners are operating at peak capacity. Ups and downs in refinery operations can be expected, as from time to time some operations must be curtailed to perform routine maintenance. This maintenance happens in the fall as refiners prepare for the upcoming winter season.

According to the Energy Information Agency, crude oil is about 41% to 42% of the cost of a gallon of gas. Distribution, marketing and/or advertising can take up another 16% to 17%. Twenty-one percent of the cost of a gallon of gas is in taxes. That leaves 20% to 21% of the cost of a gallon of gas in refining costs. Marketing and advertising budgets can be shrunk a little, but not enough to create a long-term downturn in the price of gasoline. Department of Energy (DOE) figures released October 4 showed that the national price of gasoline averaged out at $2.05 a gallon. That’s up, on the national average, about 60.8 cents a gallon from the same time a year ago. For all the different blends of gasoline sold nationwide a lot of averaging is going into a simplistic creation of a single price number.

Mississippi is included in what DOE defines as the Gulf Coast region. For reasons known only in Washington, Florida is not in that region, but New Mexico is included. A year ago the average price for a gallon of gasoline in the Gulf Coast regions was $1.42 a gallon. The Gulf Coast sector now has an average price of $1.82 per gallon of gasoline. California prices for gasoline remain the highest in the country, averaging out about $2.29 per gallon. At the same time in late September crude oil spot prices were averaging about $48.86 a barrel. That spot price for crude oil is up $20.65, on the average, from the same time a year ago.

Widely touted for years, as a help for high gasoline prices is conservation and more fuel efficient cars. DOE estimates that demand will increase another 43% during the next 20 years. There are too few refineries and too much demand. Fuel efficient cars, conservation and building another refinery or so will certainly help, but probably no longer can close the gap between supply and demand.

This is not some replay of the 1970s and gasoline shortages and long lines. It is something different. As an example and looking a little further out on a global scale, China has gone from being an exporter of crude oil to becoming an importer this year. It’s not just us and it’s not just them, it is everybody. Demand for refined hydrocarbons has escalated worldwide. Any disruption of crude oil supplies, real or perceived, will have an exaggerated impact on crude oil prices. Disruptions can be natural disasters, infrastructure problems such as refinery or pipeline outages, or any overseas supply disruption. Crude oil is a finite resource.

If you look at all the whys of high gasoline prices, it is significant that the prices are not higher than they are. Adjusted for inflation, the price of a gallon of gasoline is still about 35% lower than it was in the late seventies. New cars are more fuel efficient, but there are more cars and more people driving more miles worldwide. Government can not nor should it mandate how much one can drive or what vehicle to drive. Vastly increasing taxes on gasoline would cause undesired economic disruptions. Energy is the bottom line of almost every single product, process, or industry in our economy and in the global economy. The U.S. needs more refineries, and that may happen if the corporate operators think more refineries can be profit-making ventures and environmentalists can be placated.

There are also hybrid vehicles that combine a small fuel efficient internal combustion engine with a nickel metal hydride battery pack and an electric motor. These hybrids represent a major change in that direction. Good luck on acquiring a hybrid. I placed my order this month and hope to have my own hybrid vehicle delivered by next summer. Fuel cell vehicles that use hydrogen as the fuel and are available for the mass market are further away than the year 2010.

Consumers have not yet started to flock to fuel-efficient cars. Getting delivery of an ultra low emissions high mileage hybrid vehicle isn’t too easy. Why the high gasoline prices? Add in all the usual suspects and a complex mix of global economics and a finite crude oil resource.

Anna Crull is a business analyst with industrial and private sector experience in advanced technology consulting and analysis. She graduated from the School of Engineering, University of Mississippi and has a MS in chemistry from the University of Missouri. She has been employed by the U.S. government and private industry as an analyst and consultant. She has authored over 85 books and multi-client studies published by Business Communications Co. Inc.

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