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Free Market Project

3/7/2006 12:46:51 AM

Updated 02/24/06

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Refining: the Untold Story of the Oil Chain
Hurricane season brings more media references to refining capacity, but little explanation of this force behind gas prices.

By Amy Menefee
August 31, 2005

     It took the force of Hurricane Katrina to wake up the media to a big story: U.S. oil refining.

     Following a summer of relentless gas price coverage, the storms threat to refineries in the Gulf of Mexico added urgency to reports about the oil industry. But only one network news story in three months of summer coverage has attempted to explain the role of U.S. oil refining in the nations gasoline supply. Instead, networks have made passing references to the causes behind pricing and have criticized the free market.

     One way the networks addressed refining was to hype the profits oil companies were gaining from higher prices. As NBCs Katie Couric said on the August 17 Today, As we pay through the nose, someone has to be smelling some pretty big profits.

     Likewise, the August 11 World News Tonight pounded the oil market for making a profit. ABCs David Muir asked, But are any of those increasing profits, both overseas and at home, being spent to fix those refineries or to help solve the shrinking U.S. gas supply? Mike Rothman, an oil industry analyst, replied: There has in fact been an increase in investment, both for production of oil as well as refining. But the impact of those is not immediate. Muir responded as if he had not heard what Rothman said, continuing his attack: But analysts say theyve yet to see any improvement. And oil companies are busy spending billions in their profits reinvesting in themselves. Muir didnt look into how much of that reinvesting went to compliance costs for regulations on the industry.

     Reporters frequently cited a decline in capacity as a reason for higher gas prices, but they rarely expanded on that point. A Free Market Project analysis of summer news coverage (June 1-August 29) on ABC, CBS and NBC turned up 983 mentions for oil or gas. Networks have repeatedly covered growing energy demands and even cited record high prices for both commodities, sometimes several times in one day. Of the 983, only about 4 percent (38 stories) discussed refineries, and more than a third of those stories related to hurricane threats in the Gulf.

Refining the Coverage

     Prices have risen because demand has increased, stretching the refineries near capacity. Yet, the Cato Institutes Jerry Taylor and Peter Van Doren have pointed out that profit margins in the refining business have traditionally been rather meager.

     Taylor, Catos director of natural resource studies, said much news coverage has overlooked the fact that crude oil and gasoline are two different markets. Sometimes the two prices move together, he said, but not always. Supply and demand arent always reported correctly, either.

     If anything, a loss of refining capacity, if not made up from other sources, would lead to a net reduction in demand for crude oil, Taylor said. When refineries the consumers of crude oil demand less, the price of crude should go down.

     But gasoline and oil prices have been climbing lately, and that has raised questions about what could be done to lower consumers costs.

     ABC was the only network that told more of the story behind refining in America. World News Tonight on August 16 took A Closer Look at the decline of U.S. refining capacity. Betsy Starks report included a word with Glenn McGinnis, who has been working to launch a new refinery in Arizona. Stark pointed out that Its taken five years to get the air quality permits. The site had to be moved from Phoenix to Yuma for environmental reasons. And after a decade of planning, they still havent broken ground.

     Stark reported the strain on the 149 refineries in the United States, saying that months of operating at nearly full throttle, of trying to satisfy record demand, has produced a summer of fires, accidents and shutdowns. While those arent the only reasons for rising gasoline prices, it was a rare network attempt to report on the reasons behind the news, rather than simply hyping consumers higher costs.

     As Stark said, environmental regulations are a hindrance to building new refineries, but also to utilizing existing ones. The National Petrochemical and Refiners Association has reported that an extensive overlay or intricate and changing environmental regulations has had a direct impact on product yield and ultimately supply.

     Catos Jerry Taylor has written extensively on energy issues. His co-author for a June 4 piece on refining was Regulation magazine editor Peter Van Doren, who did his dissertation on energy markets. Taylor and Van Doren said it costs far less to expand production capacity at existing plants than it does to expand capacity by building new plants. They attributed the decline in the sheer number of U.S. refineries to government subsidies that ended around 1980, just four years after the last refinery was built.

     So should more refineries be built? The real question is are there profit opportunities and that depends on who you ask, Taylor said. Its not up to you and me. Its up to people who are investing billions of dollars. People arent going to invest in the refining business to make me happy.


National Petrochemical and Refiners Association

American Petroleum Institute

High Pump-Price Fairy Tales by Peter Van Doren and Jerry Taylor


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