1/2 of USA's Refineries Closed in 25 Years
Big oil closes refineries to create bottleneck so no matter what the price of crude does -- they make a killing. This was in the San Jose Mercury News over the weekend and thought you folks might like to read it:
High gas prices rooted in era of refinery closings
By Steve Everly
ARKANSAS CITY, Kan. - The dormant complex here at the edge of Kansas is a weathered still-life of a bygone era.
Remnants of rusty pipes and storage tanks hint at the oil refinery that once hummed here on the banks of the Arkansas River. A property that could produce enough gasoline to satisfy half the state's thirst for the fuel is now overrun with prairie grass.
Nine years after the refinery closed, some former employees still can't believe what happened to the economic lifeblood of the community since 1918.
Malcolm Turner led a group that offered its owner, France-based Total Petroleum, $37 million to buy the refinery. But Turner said Total backed out at the last minute -- offering scant explanation.
``They finally said by closing the refinery it would tighten up the market,'' Turner recalls of his conversations with Total's North American executives. ``They thought they would benefit.''
At the time, Total told employees the company was closing the refinery for business reasons. The company has declined repeated requests for more comment.
Similar stories have been quietly playing out across the country -- wiping out thousands of good-paying jobs, devastating communities and, ultimately, squeezing consumers at the gas pump.
Drawing from dozens of interviews and previously undisclosed government documents, the Kansas City Star has discovered a largely untold story of a rapidly consolidating industry that has clamped down on refining capacity to drive up profits. Now, as retail gas prices surge, what started as a legitimate business concern about overcapacity has become a recurring theme that has limited refining capacity in the world's largest oil-consuming nation.
The refining issue now occupies the world economy's center stage.
The Organization of Petroleum Exporting Countries, which itself has been under fire for high oil prices, has criticized the shortfall in U.S. refining capacity. In April, the foreign policy adviser to Saudi Arabia's Crown Prince Abdullah said additional supplies of crude oil to the United States would ``make no difference'' because we lack the refining capacity to make it into gasoline.
Federal Reserve Chairman Alan Greenspan recently called the U.S. domestic refining capacity ``worrisome.''
President Bush proposes using former military bases as sites for new refineries. Others urge streamlining environmental regulations to make it quicker to gain permits to build refineries. Still others argue for fewer types of environmentally friendly reformulated gas to eliminate production bottlenecks.
No new refineries
But such proposals miss a central question: Does the oil industry even want to significantly increase refining capacity?
ExxonMobil, the world's largest oil company, last year had a return on investment of about 25 percent on its refineries. Its 2004 earnings were $25.3 billion, a record for a public company. The company now has a cash hoard of more than $20 billion. But while the company is using some of its extra cash to buy its own stock, it doesn't have plans to build another U.S. refinery. ``You won't see our investment spending swing with changes in near-term commodity prices,'' Exxon CEO Lee Raymond recently told investors.
Over the past 25 years, 176 refineries have closed in the United States. A new U.S. refinery hasn't been built since 1976. Even with upgrades and expansions at remaining refineries, domestic capacity is down 9 percent since 1981, while demand for gasoline has increased 38 percent. Imported gasoline now accounts for 10 percent of U.S. supply.
California had 45 refineries in 1981 with capacity of 2.55 million barrels a day. By last year, the number of refineries had dropped to 21, and capacity shrank 20 percent to about 2 million barrels a day. California ranks third-highest in the nation in refining capacity and first in gasoline consumption.
All of the Bay Area's refineries are in Contra Costa County, where there are now 5 refineries, one less than in 1982. Capacity has shrunk by 9 percent over that period. Pacific Refining in Hercules, which had a capacity of 85,000 barrels a day, closed in 1994.
Overall, the industry's refining margins, the difference between crude oil and wholesale gas prices, have doubled and tripled at times to nearly 60 cents a gallon. Refinery and marketing profits, according to the Energy Department, were up 292 percent for the last quarter of 2004 when compared with a year earlier.
Indeed, the gasoline market now is so tight, industry executives say, that any demand spike, refinery outage or pipeline shortage can easily cause prices to soar.
It took ages to reach this point.
Two 1970s oil crises orchestrated by OPEC left consumers with images of long lines at gas stations and high prices at the pump. But they also marked a turning point for Big Oil that set a course for today's higher refinery profits.
A detailed portrayal of that turnabout is contained in a previously undisclosed 393-page document, assembled by Federal Trade Commission lawyers as part of an antitrust suit.
As countries around the globe nationalized their oil industries, the domestic oil industry increasingly looked to refining for profits. In some instances, according to the FTC document, the oil companies cooperated among themselves to reduce refinery capacity.
``It's not happenstance that we're short of refining capacity,'' said David Haberman, a retired former antitrust lawyer with the Federal Trade Commission and the U.S. Department of Justice. ``I really thought it could end up like it is today.''
Haberman was one of 19 lawyers who spent nearly a decade compiling a case that has been largely forgotten. The case, which was before an administrative law judge within the FTC, was dismissed in the early days of the Reagan administration. But it created a treasure trove of more than 500,000 pages of documents within the FTC that offer a rare glimpse inside the industry.
The FTC, replying to requests by the Kansas City Star, so far has refused to release most of those documents.
But the FTC's ``Complaint Counsel's First Statement of Issues, Factual Contentions and Proof'' obtained by the Star offers some details of the government's investigation of eight major oil companies. The FTC has confirmed that the document, which is dated Oct. 31, 1980, and summarizes the FTC's case, is legitimate.
The FTC's lawyers found that Big Oil was turned on its ear by the nationalization of Middle East oil. The industry had relied on the vast supplies of Middle East oil for much of its profits and plenty of refinery capacity was crucial in being able to process it.
But the loss of control of Middle East oil, according to the FTC report, meant the end of the old system. The major oil companies increasingly viewed refineries as having a new role -- a stand-alone business that needed to be profitable.
The FTC document alleged that:
¥ Competitors were kept out by refusing to sell refineries to them.
¥ In other instances, if an independent company was looking at land to build a refinery, the site was purchased to prevent it from being built.
¥ Refining capacity among the companies was controlled by sharing information on gasoline production.
¥ The companies also sought to keep from dumping too much gasoline on the market by following the ``leading firm'' in each market regarding how much gas to refine to sell to that market.
``The system worked in firming up prices,'' the FTC document concluded.
During and after the FTC's investigation, the oil companies denied the allegations that they worked together to restrict capacity.
Shortly after Ronald Reagan became president, in September 1981, the FTC withdrew its case, saying further proceedings were ``not in the public interest.'' At the time, the commission noted that the decision to dismiss did not represent a decision on the merits of the case. The case, which alleged some specific examples of ``collusive'' actions, was the largest ever brought by the FTC.
A generation later, the oil industry sees the dismissal as exoneration of the antitrust allegations.
``There have been numerous claims but there has never been a finding of collusion,'' said Edward Murphy, group director of refining and marketing for the American Petroleum Institute. ``The fact is this has been and continues to be a very competitive industry.''
The domestic refining industry, which used as little as 70 percent of capacity in the early 1980s, in recent years has reached as much as 97 percent of capacity. And that lack of spare capacity makes prices more volatile.
Edward Galante, a senior vice president for ExxonMobil, speaking at an energy conference in Houston in February, said a ``dramatic'' spike in global demand for gasoline in 2004 made the market tight. ``And in tighter markets, one can expect higher margins,'' he said.
But Galante said it was unlikely that any company would invest the billions that it takes to build more refineries in the United States. He argued that there is still the possibility that demand could decline and refinery margins would follow.
A concern about surplus refining capacity remained a recurring theme in the industry, even as utilization pushed past 90 percent.
In a 1996 internal memo, Mobil officials called for a ``full court press'' to stop an independent company from restarting a refinery in California that might reduce gas prices by 3 cents a gallon. The effort was successful.
Company officials say such efforts reflect legitimate business strategies. ``There have been various investigations that have concluded there has been no wrongdoing by the oil companies and the industry in general,'' said Carolin Keith, a spokeswoman for ExxonMobil.
A spokesman for Chevron, which later acquired Texaco, said the company has continuously upgraded and expanded existing refineries.
Patricia Woertz, executive vice president of Chevron's downstream operations, said in a recent speech that expansion of the nation's refining infrastructure would seem an obvious solution. But Woertz said any company would be hard pressed to find a community that would welcome a new refinery.
``Even if you believe the investment economics have become more favorable, other discouragements remain,'' she said at an industry conference in San Francisco.
Mercury News Staff Writer Matthai Chakko Kuruvila contributed to this report.