The politics of petroleum refining has become a circus of contradiction in the US. On the West Coast, liberal senators who would never sanction a new refinery are trying to keep an old one from closing. And on the East Coast, two states have followed California's lead in trying to escape the need to replace a gasoline additive they rushed to prohibit.
The West Coast hubbub involves plans by Shell Oil Products US to close its 65,000 b/cd refinery in Bakersfield, Calif., on Sept. 30. The plant was designed to process locally produced heavy crude. Shell says diminishing feedstock supply will make the 70-year-old refinery unprofitable after the closure date. It will convert its Bakersfield terminal to handle products from more-efficient refineries elsewhere on the West Coast.
Tough decision
Decisions to shutter refineries are never easy. Shell's decision disrupts the lives of 250 full-time workers in Bakersfield and of 150 contractors. And closing a refinery is never cheap. In association with its Bakersfield move, Shell took a $200 million charge against earnings in last year's fourth quarter.
The company's economic assessment and motives have come under challenge from West Coast interest groups and allied politicians.
In February, Sen. Ron Wyden (D-Ore.) requested a Federal Trade Commission investigation of Shell's plans. Citing oil-company mergers, he asked the FTC to determine whether the move "will cause further anticompetitive problems in West Coast gasoline markets" and to act as necessary.
Before the FTC agreed this month to conduct the investigation, Sen. Barbara Boxer (D-Calif.) chimed in, claiming to know of two potential buyers for the Bakersfield refinery and asking the FTC and the state attorney general to block the closure. "If the Bakersfield refinery is closed," she told FTC, "consumers will be faced with higher prices." She asked the attorney general to act in order "to protect consumers from anticompetitive practices."
Wyden and Boxer apparently doubt Shell's assessment of the refinery's viability and think it's spending at least $200 million just to elevate product prices. That would be quite a gamble; indeed, no reasonable investor would make it. Nor would any reasonable investor write off a profitable asset to manipulate price. The suspicions of Wyden and Boxer make no sense.
The senators at least acknowledge the relationship between supply and price. By the standards of West Coast politics, such insight is rare. In this case, though, it's misguided. Oil consumers would truly benefit if Wyden and Boxer channeled this new concern about oil supply to issues such as leasing of the Outer Continental Shelf off their states and of the Arctic National Wildlife Refuge in Alaska. Alas, they're far more likely to continue squeezing oil companies for political gain and sustaining the West Coast's reputation for hostility toward business.
California creates many of its own fuel problems. Its gasoline content and performance specifications are the nation's strictest. And it banned methyl tertiary butyl ether, which refiners blend into reformulated gasoline to meet a federal requirement for oxygen. New York and Connecticut also have banned MTBE and, like California, face high costs of their decision.
In the absence of MTBE, refiners must produce a low-volatility, unfinished gasoline for batch-blending with ethanol just before delivery to service stations. This introduces logistical costs and precludes supplementation from other markets when supplies are short. Fragility of supply worsens during summer, when demand is high and blendstock volumes drop by about 10% as refiners remove volatile components to meet hot-weather specifications. With gasoline prices already high in a nationally tight market, consumers in California, New York, and Connecticut can expect a new price surge very soon.
Seeking waivers
Sensibly, all three states seek waivers to the mostly unnecessary requirement for oxygen in reformulated gasoline. But the Environmental Protection Agency is in no hurry to comply. The waivers would underscore the lack of an environmental reason to force ethanol into gasoline and the high costs of doing so. They'd kill off ethanol-centered energy legislation still gasping for life in Congress. And they'd alienate politically powerful agricultural interests in an election year.
The waivers would help consumers, though. From the political contradictions that so frequently and needlessly add cost to fuel manufacture, the people who buy gasoline surely need relief.
