The Ripple Effect Of Refinery Fires

Production Breakdowns Push Gas Costs Higher Across Industry

In February, fire broke out at a 74-year-old oil refinery in the heart of the Texas Panhandle.

At about 2 o'clock on a Friday afternoon, liquid propane escaped from storage tanks, formed a vapor cloud and ignited. Within minutes, buttresses that held pipes 25 to 30 feet above the ground collapsed, spilling more fuel on the fire. Three 1-ton cylinders of toxic chlorine gas were damaged. A dozen people were injured, one critically.

The accident also put a dent in the nation's gasoline supplies. It was the fourth fire at a Valero Energy oil refinery this year and one of a dozen to have hit U.S. refineries since Jan. 1.

The rash of fires and other breakdowns, known euphemistically in the industry as "unplanned outages," helps explain why motor-fuel prices have soared 36 percent this year. With the U.S. oil refinery industry already stretched thin, breakdowns and maintenance shutdowns have drained gasoline inventories just when the nation's refiners would usually be ramping up for the summer driving season.

"When these facilities have one of these catastrophic events, it can have a disproportionate effect on the gasoline market," said Carolyn W. Merritt, chairman of the Chemical Safety and Hazard Investigation Board. Lynn Westfall, chief economist and vice president for strategic planning for Tesoro, an independent refiner, said that because "we're operating on such a razor-thin margin, we're always one refinery incident away from a spike in prices."

The amount that consumers paid to refine a gallon of gas more than tripled between January and May, according to the Energy Information Administration. In the past couple of weeks, a wave of gasoline imports has boosted inventories and eased prices slightly, putting the national average at about $3 a gallon. Yet gasoline inventories are still 10.6 million barrels, or 5 percent, below comparable levels a year ago, said Eitan Bernstein, oil analyst with Friedman, Billings, Ramsey Group.

Bernstein said "inventories will remain low throughout the summer, supporting the current high refining margin environment with any unexpected supply disruptions producing price spikes," Bernstein said.

Peter K. Ashton, president of Innovation & Information Consultants, which specializes in analyzing the petroleum industry, said inventories are near the minimum level for smooth operation of the entire distribution system. "The system itself is moving closer and closer to the breaking point, such that any little hiccup in terms of a supply curtailment, even one that lasts only a couple of days, can cause precipitous price spikes," Ashton said. "This was not the case prior to the year 2000, when the companies carried larger inventories."

With gas hovering at about $3 per gallon and with refining profits at record levels, consumers and lawmakers are asking whether the oil industry has conspired to fix prices.

"On the surface, it seems that Big Oil is pumping cash rather than petrol," Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, said at a recent hearing on whether to break up the major oil companies. He said that in 1993, the five largest oil refiners controlled a third of the U.S. market; by 2005, they controlled 55 percent, and the 10 largest held more than 80 percent. And he questioned why the major oil companies were buying back shares instead of investing more in refinery additions or maintenance.

"I don't understand how an industry that makes tens of billions per year can still have rusty refining plants that constantly break down," Schumer said. "And I don't know any other industry where an equipment breakdown in one company benefits every other company by raising prices."

Profits are certainly soaring, not only for exploration and production firms that benefit from high crude oil prices but also in the refining business, where the crude is turned into such products as gasoline, heating oil and naphtha. Bernstein estimates that profit margins for refining hit $28.75 a barrel at the end of May, far beyond traditional levels.