European Union drivers see $3/gal gasoline as deliriously cheap, but to many Americans that price is an assault on their rights. Politicians, editorialists, and TV commentators tell them they are in this plight because the industry has shut down scores of refineries and hasn’t built any for years. This conclusion is incorrect.
Yes, since 1981, 171 US refineries have closed, dropping the number operating to 132 today. This accounts for a statistical loss (because capacities are dynamic) of some 1.7 million b/cd to today’s total capacity of 16.8 million b/cd. That sounds like a lot. But it’s quality of capacity, not quantity, that counts.
Dull refineries
This writer, now retired, was early in his career Oil & Gas Journal’s refining editor. He had the miserable job once a year of analyzing and reporting on swarms of dull new refineries that in the 1970s started cropping up in OGJ’s respected annual refining reports.
Most were small, far from the 200,000 b/cd world-class size. One of my favorites was a 2,500 b/cd “refinery” that could be transported on an 18-wheeler’s flatbed. We ran a picture of it on its way to Nixon, Tex., some 35 miles from San Antonio.
Big grassroots refineries were also being built then, with downstream horses (fluid catalytic cracking and hydrocracking, catalytic reforming, and alkylation) to make plenty of gasoline. But the small newcomers brought in little if any gasoline-making capability. To be fair, some well-configured smaller refineries were launched during that era.
But our analysis at one time showed 500,000 b/cd of this “nickel-and-dime” capacity had no associated vacuum distillation, which pulls excellent cracking stocks out of the residue from atmospheric distillation and is a fundamental step in serious refining. Without a vacuum unit a refinery is often disparagingly called a “pot still.” The new, small facilities were considered “refineries” by the US regulations that created them.
How did it happen? Early in the 1970s US inflation was heating up so badly that President Richard Nixon instituted wage and price controls. After several phases, the controls came to focus on the oil industry.
Importantly, during this decade, the Organization of Petroleum Exporting Countries was flexing its muscles, seeking higher prices, taxes, and royalties for its members’ crude oil.
In October 1973, as a result of the Yom Kippur War, Arab producers embargoed crude to the US and Netherlands. The price of world crude headed up nearly to the teens.
In November 1973, Nixon signed the Emergency Petroleum Allocation Act authorizing petroleum price, production, and marketing control.
In late 1974, Congress enacted an entitlements program dictating that US refiners with access to price-controlled-and therefore cheap-domestic crude had to pay refiners processing foreign crude, which was free of price controls and therefore more expensive. The system included a bias favoring small refiners. A refiner without enough capacity to process its “entitlements” could transfer them to another.
Unintended consequences appeared as a mass of new distillation capacity and a binge in fuel consumption. Americans were burning some of the cheapest oil in the world.
President Ronald Reagan ended both binges. In his first official act as president in 1981 he abolished price controls and the attempts at equalization that came with them. Erosion of refining capacity started, dropping the US total by 800,000 b/cd in 1982. By 1984 the decrease below 1981 totaled some 1.7 million b/cd. This then was the phantom capacity: there but not really there, the product of a federal fiasco. If this sort of capacity should reappear today, it would hardly be noticed at the unleaded gasoline pump.
There has been no loss over the past two decades in the capacity of US refining units that count; in fact, there have been some gains.
CAFE loophole
But the failure of the corporate average fuel economy (CAFE) program, which has a loophole big enough to drive a truck through-well, a sport utility vehicle or Hummer-has chewed up a good portion of this US gasoline-making capability.
There is little doubt that if demand is not reined in, the US will need a major grassroots refinery or two-off the Gulf Coast. But new refineries cannot be justified just for hurricane preparedness or outage standby.
Dare we suggest New England? Next year’s construction report in this issue could offer some exciting reading.
Editor’s note: Leo R. Aalund, who for many years was Oil & Gas Journal’s managing editor-technology, retired in 2003.