Editorial: Attention to refining

Sept. 26, 2005
It took a body blow to national energy supply, but the subject of petroleum refining finally has the attention of the US Congress.

Attention to refining

It took a body blow to national energy supply, but the subject of petroleum refining finally has the attention of the US Congress. For refiners and fuel consumers, an important question is whether attention of that sort is a good thing.

Congress doesn’t often deal constructively with refining. Most of its members know little about refining, a technically complex subject having to do with facilities that are unappealing to several human senses and occasionally dangerous. Historically, lawmakers as a group have favored environmental caution over practicality when dealing with refining legislation and regulatory oversight. And some of them act as though they believe, despite consistent evidence to the contrary, that the engineers and scientists who run refineries conspire to unfairly elevate prices of oil products.

From such a hodgepodge of misapprehension and suspicion, quality legislation is unlikely to emerge. The message nevertheless seems to be getting through that US refining capacity needs work.

Capacity and consumption

To the industry, this has long been clear. Since 1983, the peak year for US refining capacity, consumption of oil products has trended upward, while capacity has trended downward, though not without interesting excursions in the other direction. Increases in imports of petroleum products and in capacity utilization make up the difference. In 1983, when refineries worked at an average capacity utilization rate of 72%, the country imported 1.7 million b/d of product. Last year, the capacity utilization rate was 93%, and product imports averaged 2.9 million b/d.

To the extent that dependence on others for oil compromises national security, one concern is obvious. And there are two other large worries. One concerns the ability of exporters to supply products of the types and quality that the US requires. The other is the effect of supply disruptions on a capacity-limited system straining to meet growing demand.

The US had reasons for all those concerns, manifest in steadily rising product prices, before Hurricane Katrina walloped refining capacity in Louisiana, Mississippi, and, briefly because of pipeline outages, the Midwest. The price leaps that followed Katrina inspired committees of the House and Senate to hold hearings at which industry representatives had the chance to address the importance of refining to US interests. Alas, they had to make their sensible observations amid accusations about “gouging” and price manipulation.

At least one lawmaker came away curious, however. After a hearing of the House Energy and Commerce Committee, Rep. John Dingell (D-Mich.), the chief minority member, sent the Department of Energy a list of questions about recent trends in refining capacity (see Newsletter). A longtime critic of oil companies, Dingell can be counted on to distort the answers to make refiners look villainous. And his interpretation of refining capacity declines that occurred as provisions of the Clean Air Act Amendments of 1990 began taking effect should be amusing. But at least he raised the questions.

Equally interesting will be the refinery bill Rep. Joe Barton (R-Tex.) promised at the same hearing. He said the legislation probably would include designated refining areas and offer incentives, apparently for refinery construction. “We thought when we went to Albuquerque for the energy bill signing that energy had been taken off the agenda for a while and we could focus on telecom and health,” Barton said. “Then Katrina hit, and energy is back on the agenda big time.” His reference, of course, is to the energy bill that included a huge and costly requirement for ethanol in gasoline. A useful refinery bill would not only encourage additions to refining capacity but also reverse mistakes like that.

Legacy of excess

New attention by Congress to refining capacity needs to be serious. Efforts to encourage refinery construction won’t work if Congress doesn’t do something about a legacy of official excesses that discourage refining investments other than those required by statutes and regulations. That doesn’t mean unraveling environmental regulation; it means accommodating refining regulation to a business framework that lets capacity expand in step with the market.

This new attention began with the massive hole Katrina punched in the oil market-a hole the size of four refineries still off line. At this writing, with Hurricane Rita menacing the Texas coast, the hole looked set to grow. Maybe the attention will, too.