The Ripple Effect Of Refinery Fires

The oil industry says it's not to blame for high prices. "I would beg to differ about whether it is a question of industry competition instead of a factor of supply and demand," said David Sexton, head of U.S. oil products for Shell Oil.

Rex W. Tillerson, chief executive of Exxon Mobil, blames rising prices on consumers, who are using about 1.5 percent more gasoline this year than last despite the high prices. "The industry is producing record volumes of gasoline today, but the consumer is burning record volumes of gasoline today," he said at Exxon's recent annual meeting.

Valero disputes the assertion that it would intentionally shut down refineries to boost prices. "In high-margin environments, we'd much rather have our refineries running at full capacity," said Bill Day, a Valero spokesman.

The criticism over refining profits strikes many veteran oil executives as an odd twist of fortune. For decades, refining was the dregs of the oil business. The major oil companies were integrated from the oil well to the automobile gasoline tank, and the refineries in the middle of that chain were valued mainly as a means for moving as much oil as possible. Fadel Gheit, oil analyst at Oppenheimer & Co., says it was like an amusement park owner who gave people free transportation to the park.

In the 1980s, refineries operated at 78 percent of capacity, on average. Profit margins were small and competition was stiff. Unions were strong, and small, independent refiners ran tiny units known as "tea kettles" to take advantage of regulations favoring them.

However, acceptance of that changed. Business consultants and academics taught executives to treat every part of the business as a profit center. Investments in refining slowed. In 1983, Mobil did a study about the feasibility of selling its entire refining business.

"The industry was not going to throw good money after bad," said Gheit, who worked at Mobil. "They never earned decent returns. Capital goes where it's treated best."

Companies also trimmed inventories, thus saving by not tying up the money it takes to buy extra oil, while consumption grew. Gasoline stocks are now enough to cover 21.1 days of typical consumption; in the early 1980s they were enough to cover about 40 days. (The Strategic Petroleum Reserve holds only crude oil, which does not alleviate the refining crunch.) The industry complains that the Clean Air Act and other environmental regulations have forced refiners to spend on expensive upgrades to slash sulfur dioxide and nitrogen oxide emissions. The American Petroleum Institute said environmental upgrades cost billions of dollars. Refinery expansions lagged. With an end to oil price controls that had helped small, inefficient refineries, many of the tea kettles closed down.

Though a new refinery has not been built for 30 years, capacity expansions at existing refineries have amounted to the equivalent of 10 new refineries over the past 10 years, according to API. But capital investments in refineries are expected to total 6 percent of the investments in U.S. exploration in 2007, according to the Oil & Gas Journal. And several refinery expansion projects have been shelved recently because of rising costs.

Now U.S. refineries routinely operate at more than 90 percent of capacity and still cannot satisfy the needs of American motorists. The United States imports 13 percent of its gasoline supply from 43 countries, said Westfall, the Tesoro executive. The stepped-up use rates help explain this year's breakdowns and long maintenance shutdowns, oil analysts said. The breakdowns result from pushing refineries too hard, some industry executives say. After hurricanes damaged some refineries in late 2005, that meant other refineries had to work extra hard.

That also led to longer maintenance shutdowns, Westfall said. Gheit adds that the explosion at BP's Texas City, Tex., refinery, which killed 15 people in March 2005, also lengthened maintenance times because all companies wanted to be more careful. "It is like slowing down on the highway after seeing an accident," Gheit said. "It is taking longer for refineries to come back from typical regular maintenance because the accident with BP put everyone on guard."

A shortage of skilled workers is another factor. A report from the Chemical Safety and Hazard Investigation Board on BP's 2005 explosion showed that the refinery's staff was overworked and undertrained. Valero's chairman has complained to analysts that he was having trouble hiring good engineers. He was not only competing with lucrative jobs in places like Saudi Arabia; nowadays, engineers can earn about $300,000 on tar sands projects in Canada, where as Gheit says, people speak English, can buy a beer and watch football on television.

Now, oil companies say they are hesitant to build more refineries because of potential competition from biofuels, with which President Bush wants to replace 20 percent of the nation's petroleum-based motor fuel. Tillerson said: "When we do the numbers, you don't need another refinery. If these biofuels objectives are to be met, and they're mandated to be met, to build another refinery would be a very risky proposition."

Other energy analysts question the oil companies' reasoning. Tillerson, at the same annual meeting, told shareholders who were pressing him to have Exxon invest in renewable energy resources that the world would be thirsty for oil for as long as he could imagine.