U.S. REFINERS SEE TIGHT FIT FOR WINTER SUPPLY

U.S. refiners say they should be able to meet winter products demand, although the margin of safety will be razor thin with the shortfall of crude and products supplies stemming from the Persian Gulf crisis.

In other U.S. developments related to the Persian Gulf crisis, legislators pressed efforts to punish purported gasoline price gouging.

Meantime, in a speech to Congress last week President Bush called for legislators to pass incentives to encourage U.S. drilling and energy conservation before they adjourn.

In addition, the Senate passed a resolution 97-2 branding Iraqi President Saddam Hussein a war criminal if fighting breaks out between the U.S. and Iraq. The resolution said Hussein and other "perpetrators" should be brought before an appropriate international tribunal and tried as war criminals. Opposing the resolution were Sens. Bob Kerry (D-Neb.) and Jeff Bingaman (D-N.M.).

REFINING TIGHTNESS

U.S. refiners told Congress last week that although capacity is tight at their plants, they should be able to meet demand this winter.

Rep. Phil Sharp (D-Ind.), House energy and power subcommittee chairman, called a hearing to study U.S. refining capabilities.

Sharp noted, "With more than 90% of U.S. refining capacity in constant use, there is now a very small margin of safety. Necessary down time, repairs, and engineering changes to comply with new environmental rules can make the problem worse."

He said the Iraq/Kuwait crude export shutoff will leave U.S. refiners with lower quality crude supplies, requiring more capacity from an already strained industry.

Sharp said, "Extra refining capacity is what we may really need. But increasingly we have less capacity and more demand. In the short run, we need to do all we can to increase flexibility in the system and remove bottlenecks."

He has asked Transportation Sec. Sam Skinner to waive Jones Act tanker restrictions, if necessary, to help move oil where it is needed in the U.S. and Energy Sec. James Watkins to use the Defense Production Act, if needed, to give priority attention to refinery repairs or other fuel bottlenecks.

Meantime, Skinner, citing sealift problems in the Persian Gulf military buildup, is considering asking for renewed subsidies for the maritime industry. Such subsidies totaled $212 million last year. Skinner said the deployment has shown the need to maintain "a U.S. flag fleet of some size, with ships that make sense not only for commercial purposes but also for defense purposes."

REFINERS' VIEWS

Dewey Mark, president of Diamond Shamrock Inc., testified for the National Petroleum Refiners Association and the American Petroleum Institute.

He noted U.S. refineries are more complex and better capable of responding to changing crude quality and product demands than any other refining sector in the world.

Mark said, "If there are no major disruptive events in the market, the refining industry will be capable of meeting near term demands. I do caution, however, that the supply balance is tight."

He said new Environmental Protection Agency rules will not help the situation. EPA recently issued regulations to cut sulfur and aromatics levels in diesel fuel, "an extraordinary added burden for this industry and a further reduction in the capability to manufacture other petroleum products such as gasoline, aviation jet fuel, and home heating oil."

Further, recent rules to reduce volatility of motor gasoline will prove very costly for refiners, and reduce the volume of gasoline derived from a given barrel of crude oil, Mark said.

"We are concerned that the requirements of the new permitting section of the pending Clean Air Act will make it even more certain that no new domestic refineries will be built.

"in addition, it is unlikely that permits can be obtained in time to expand or modify existing refineries to meet new environmental restrictions on fuels."

EIA SUMMARY

Calvin Kent, Energy Information Administration administrator, agreed U.S. refinery capacity should be adequate.

He said EIA's views are based on these assumptions: the 4.3 million b/d loss of crude oil to the world market will not increase, there will be no change in the political and military situation, there will be a normal winter, no major refinery problems will develop, and companies will not build crude stocks above normal levels.

Congressmen attacked the assumptions as unrealistic. Rep. Mike Synar (D-Okla.) and Billy Tauzin (D-La.) called them "rosy and optimistic."

Kent said, "U.S. refiners have been producing at near maximum capacity (97.6% in July and 96.2% in August), which is well above the operating levels for previous years."

He observed refinery utilization usually declines in the fall and spring, as refineries switch over product lines, and maintenance is done in those periods.

"If there are any unusual maintenance problems that develop at major refineries during the fall switchover, short-term problems could develop."

He said there currently is 15.5 million b/d of refining capacity in the U.S. and 41.2 million b/d of capacity outside the U.S., which will be adequate the next 3-6 months.

"In addition, there is additional distillation capacity being brought on line in the U.S. which could produce up to 113,000 b/d by the end of 1990. This is not due to the building of new refineries, but enhancements to existing refineries and reactivation of three refineries that had been taken out of service earlier this decade."

He did say replacement crudes for the lost Iraqi and Kuwaiti oil "are only of slightly lesser quality than those previously imported, and U.S. and world refineries should be able to process these crudes with little additional difficulty.

"Similar comments have been made about the quality of crude oil in the Strategic Petroleum Reserve. The quality of oil in the SPR is at least equal to and probably exceeds the quality of oil that was imported into the U.S. during 1989."

Kent said current gasoline inventories are quite low, jet fuel stocks are tight, propane stocks may be a source of concern, but home heating oil stocks appear to be adequate.

GASOLINE PRICE CONTROVERSY

Eight senators and 27 House members have filed bills in both houses to allow the president to block "unreasonable" price increase in petroleum products during shortages.

They would give the Justice Department power to investigate allegations of petroleum profiteering. Courts could levy fines of $5,000/offense and impose 5 year jail terms. The government also could seize illegally obtained profits.

Sen. Richard Bryan (D-Nev.) said gasoline prices have increased 22/gal in the past 5 weeks, claiming, "in the days immediately after the invasion the big oil companies lost no time in running up prices.

"There was no shortage of oil to justify such a rapid rise in the price of gasoline."

Meantime, the Society of Independent Gasoline Marketers of America contends major refiner/marketers are restraining products prices at their own outlets but not the wholesale price charged to independent distributors.

Sigma said, "Intentional or not, the resulting price discrimination is serving to shift market share away from independents and toward outlets controlled by integrated oil companies. If this is allowed to continue, independent marketers will be forced out of business."

BUSH CALLS FOR INCENTIVES

In a televised speech to a joint session of Congress last week, Bush said congressional incentives "should include my proposals to increase incentives for domestic oil and gas exploration, fuel switching, and to accelerate development of Alaskan energy resources without damage to wildlife.

"As you know, when the oil embargo was imposed in the early 1970s, the U.S. imported almost 6 million b/d of oil. This year, before the Iraqi invasion, U.S. imports had risen to nearly 8 million b/d. We had moved in the wrong direction. Now we must act to correct that trend."

Bush noted the oil producing nations of the world are replacing the lost Iraqi and Kuwaiti oil.

"More than half of what was lost has been made up, and we're getting superb cooperation," he said. "If producers, including the U.S., continue steps to expand oil and gas production, we can stabilize prices and guarantee against hardship.

"Additionally, we and several of our allies always have the option to extract oil from our strategic petroleum reserves if conditions warrant. As I've pointed out before, conservation efforts are essential to keep our energy needs as low as possible.

"We must then take advantage of our energy sources across the board: coal, natural gas, hydro, and nuclear.

"Our failure to do these things has made us more dependent on foreign oil than ever before. And finally, let no one even contemplate profiteering from this crisis. We will not have it."

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