REFINERY CUTS POINT TO PROBLEMS IN U.S.

Another U.S. refinery takes the plunge. Chevron Corp. says it will cut by at least one-third the crude capacity of its 315,300 b/cd plant at Port Arthur, Tex. The announcement, sixth in the past 6 months, brings to 370,000 b/d the amount of U.S. refining capacity tagged for cut or closure.

In times past, wholesale refinery trimming would have raised alarms in the nation's capital. This one should, too. As a matter of security, a major industrial country ought to possess crude capacity sufficient to meet its demand for petroleum products. The U.S. hasn't satisfied that rosy standard since 1984. After the recently announced cuts, refining capacity will total about 15 million b/d. Petroleum product demand will rise to 17 million b/d next year-roughly what U.S. refineries, after noncrude inputs and processing gains, might make if they operated at 100% capacity utilization all year, which they cannot. What refineries cannot make, of course, the U.S. must import.

Security implications of a mismatch in refining capacity and demand don't grab much attention anymore. Links seem secure between the U.S. and its sources of foreign petroleum supply. And dissolution of Communist military power tempers concern about security overall. Indeed, when it comes to recent refining capacity losses, the U.S. needn't bother much about national security effects. It has other reasons to worry.

MORE TO COME

Refining capacity cuts still to come will make 370,000 b/d look small. Stubbornly sluggish demand explains some of the gloom. But the market doesn't play as great a role in the current shakeout as it did in the industry contraction that trimmed U.S. crude capacity from its 1980 peak of 18.6 million b/d. Current cuts result mostly from the costs of burgeoning and often excessive environmental regulations.

Refiners have removed lead from most gasoline. They must reduce the sulfur content of diesel fuel. They have paid more than a proportionate share for hazardous waste cleanup. They have met tightening standards for gasoline volatility. Now they must make gasoline according to recipes in 1990's Clean Air Act (CAA) amendments.

Environmental problems warranted some of these mandates and costs-but not all. Environmental policy making tends to overreach and ignore costs. So refiners now examine the investments they must make and the costs they must bear just to satisfy government demands-especially those associated with CAA-and increasingly decide they have better uses for their money. The growing demands hit small, independent refiners hardest of all.

LIKELY LOSSES

No one knows how much U.S. refining capacity will disappear. One private estimate puts the loss at 2-3 million b/d by the middle of this decade. That would trim capacity to 12-13 million b/d, lowest since 1969-70. Demand in those years averaged 14.1-14.7 million b/d. With modest growth, demand in the mid-1990s will exceed 18 million b/d.

The new shakeout will have certain consequences. Refinery workers will lose jobs. Product imports will displace some crude imports, which means more tankers entering U.S. ports because product carriers are smaller. The number of U.S. refiners will decline. And non-U.S. refiners will command a growing share of U.S. markets.

When officials make environmental demands, they don't intend to aggravate unemployment, raise risks of near-shore oil spills, reduce competition, or add a dimension to growing U.S. dependence on imported petroleum. They just don't think about these things very much. Maybe a foundering economy will encourage them to start.