Page 2 of 2   <      

The Battle Over the Blame for Gas Prices

Major refiners say that the shortage of capacity in their industry has been years in the making and, because of the long time it takes to build refineries, will also be years in the fixing. For years, it was a low-margin, capital-intensive business. Investors shunned refining companies, and many refineries were put up for sale at relatively cheap prices or closed.

"The curves have crossed, and [profit] margins have improved," said Bruce Smith, chairman and chief executive of Tesoro Corp., a large independent refiner. "Only by improving margins do people have enough to invest in new facilities."

This year, however, billions of dollars of investments in refineries will be channeled into improving the quality of petroleum products to meet new environmental standards, companies say, cutting the sulfur content.

U.S. refining capacity today is about 16 million barrels a day, about the same as it was in 1983, but the refineries run at much higher utilization rates.

To the extent that new cash is flowing into the energy business, much of it is flowing to commodity markets from investors, not oil companies. Oil consultant Philip K. Verleger estimates that $60 billion in cash has flowed into oil commodity markets over the past two years, contributing to the climb in prices. When expectations of future price increases hit a certain level, they can create a momentum of their own.

There is little sign that the forces driving crude oil prices higher will ease in the coming weeks or months. Those forces have been tangible as well as psychological: Supply disruptions in Nigeria that have lowered output there by half a million barrels a day; anxiety about the U.S. face-off with Iran over inspections of nuclear facilities and the talk of military action against Iran, which exports almost 2.5 million barrels a day; prolonged repairs to Gulf of Mexico production facilities damaged by hurricanes last year; and U.S. consumer demand that continues to run strong in seeming defiance of rising prices.

Yesterday, Shell Oil Co. announced that it would resume production slightly sooner than expected on its Mars platform in the Gulf of Mexico, providing a rare bit of solace to oil markets. Marvin Odom, Shell's executive vice president for exploration and production, said in an interview that the platform, damaged by Hurricane Katrina, would begin production in the second half of May and reach its full 140,000-barrel-a-day capacity by the end of June.

During the hurricane, the platform's 1,000-ton rig fell on the platform substructure, its derrick toppled over and sank, and its two pipelines were hit by the anchor of a mobile drilling rig that was drifting in the 175 mph winds and 80-foot waves.

<       2

© 2006 The Washington Post Company