Last Thursday, a fire at the aging Chevron refinery in Pascagoula, Mississippi, temporarily sidelined one of the 10 largest oil refineries in America. Although Chevron says most of the refinery is undamaged, it has not restarted yet.
The Pascagoula refinery celebrated its fortieth anniversary in 2003. It makes gasoline and jet fuel, among other products, from crude oil. As news of the fire spread, the price of oil jumped $2 per barrel to $71 on commodities exchanges.
Hurricane Katrina showed how shutting only a few refineries can make a large impact on prices American consumers pay for gasoline and heating oil. As the refineries and oil platforms near the Gulf of Mexico struggled to recover after Katrina, American politicians asked if we had enough oil refining capacity.
Because of stricter environmental standards, there has not been a new refinery built in the United States since 1976, while the number of oil refineries has shrunk dramatically from 301 to 149. Refineries that still exist have to try to run near full capacity to keep up with American demand. Some areas require special gasoline formulations to reduce auto emissions, which drives up prices everywhere.
Self-serving statements from the National Petroleum Refineries Association say that American oil refinery capacity has increased. "With the amount of new capacity U.S. refiners have added at existing facilities since 1994, it's as though the industry has been building a new, world class refinery each year," said Charles Drevna, executive vice president of the association. He says refining capacity has increased by 177,000 barrels per day.
If that is true, shouldn't the price of gasoline and heating oil be lower? The U.S. Department of Energy tracks oil refinery output. While the amount of gasoline supplied by American refineries is about 285 million barrels per month, the amount of refinery capacity devoted to gasoline production has fallen by 10 percent from 1983. The amount of fuel oil produced by American oil refineries has fallen by five percent since the record high production of about 135 million barrels per month in 2001.
As we witnessed after Hurricane Katrina and the Pascagoula refinery fire, American refineries are fewer in number, so a disaster at even one drives up crude oil prices. Even tiny swings in the price of crude oil increase the cost of finished products consumers buy. Expect candidates for President of the United States from both major parties to argue for more oil refineries or at least repeal of the laws of supply and demand.
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