[IP] more on where your gas dollars go
Begin forwarded message:
From: Robert Lee <robertslee@xxxxxxxxxxx>
Date: September 10, 2005 9:24:18 PM EDT
To: dave@xxxxxxxxxx
Subject: RE: [IP] where your gas dollars go
There is no reason for a refinery to want to build new refineries or fix
broken ones. The US government has allowed the critical mass of
refinery companies (downstream oil companies, as opposed to upstream) to
merge until there are few enough that they can with a wink and a nod
limit the refinery capacity. They have also allowed the upstream oil
companies to merge with the downstream companies. Thus the anti trust
based breakup of Standard Oil has been two thirds undone.
A naïf might ask why refineries would want to limit production. The
main reason is that the price/demand curve for gasoline and heating oil
are fairly "elastic". Elasticity is a measure of how resistant demand
is to price. While not as elastic as, for example, brain surgery (if
you need a brain operation you do not shop for the cheapest deal) it is
elastic enough that if they reduce the supply, thereby increasing the
tension between supply and demand, which then increases the prices they
can get, the ultimate reduction in unit sales (the amount of fuel they
sell) is more than offset by the higher cost.
This is another test of mono(oligo)poly-hood. Why would a monopoly want
to make $X producing Y unit sales when they can make $X producing only
0.8Y unit sales?
Because we are who we are (neither jungle hunters and gatherers for whom
nature has provided everything, nor arctic Eskimos for whom nature has
provided very little) we have in our bellies the need for progress,
organization, growth. We create governments, the best at first
represent the people, then represent groups of people, then businesses.
The cycle takes, if you look at history, a couple to a few hundred
years. Finally business and government merge as businesses become the
main representatives of the government and the people and government
become estranged.
It has happened before. It is happening here, now. If you go to
Ireland they will talk about the "fookin' landlords" (the English).
The thing that most enabled the English to be "landlords" was the total
absence of inheritance tax (what George Bush, stoolie for the rich)
calls the Death Tax. In England it was common not to buy a property but
to lease it. For a hundred years or a thousand years. Ownership never
changed because there was no inheritance tax.
The inheritance tax (which, tellingly and ironically for the Bush
administration, is supported by EVERY single billionaire in the country)
has kept this country from becoming a nation of haves renting to
have-nots. The inheritance tax forces a reshuffle of cards, another
throwing of the dice, each and every generation.
In metaphoric terms we are now in the middle 1700's. The new Atlantic
and Pacific Tea Companies are the Dr. Bronner All in One God Businesses
and around the corner is the next revolution.
Marx talked about this pulsing cycle. Say the word Marx today and you
get a visit from the FBI. But he was not wrong about everything. It is
quite possible that we will enter a period very much like communism as
we get to a point where citizen buying power implodes (due to
productivity creating production through capital investment rather than
via labor)and where business gets so far into bed with government that
it effectively becomes "outsourced government". More and more
businesses find themselves in the vulnerable position of being dependent
on the government, and all working for, what else?---as Jonathan Swift
predicted the better part of 400 years ago, the national security. When
all goods and services come under Homeland Security you will have a
situation in which all goods and services become an offering of
government and are a right of citizenship.
Then how wrong will Marx have been? His only mistake was in not taking
into account the effect of representative government. But that is
understandable given that Europe was in the death grips of a bunch of
kings each of whom were actual blood cousins. Through evolution, not
revolution, communism is coming. The right wing, with its mergers and
molly coddling of mega business only speeds the day.
I am feeling positively apocalyptic these days. Starting in January of
2000 I became confused, very confused. I was confused until a few
months ago. Then it all started coming together. The vision is not a
reassuring one, but having the vision, being able to make sense out of
what is happening, is reassuring. And being a have that will be dead
before the evolutionary shit hits the evolutionary fan in its
excruciatingly slow Zeno's paradox sort of way, is reassuring too.
Bob
-----Original Message-----
From: David Farber [mailto:dave@xxxxxxxxxx]
Sent: Saturday, September 10, 2005 7:23 PM
To: Ip Ip
Subject: [IP] where your gas dollars go
September 11, 2005
Storm Stretches Refiners Past a Perilous Point
By JAD MOUAWAD
For the nation's oil refiners, Hurricane Katrina was a disaster long
in the making.
Analysts and industry executives had for years feared the
consequences of a storm ramming into the country's largest energy hub
- a complex infrastructure that spans most of the coastline between
Texas and Alabama, where nearly half of the nation's refineries are
located.
Hurricane Katrina confirmed the worst predictions. Wreaking havoc
along the coastal states, drowning New Orleans and leaving many dead,
the storm shut down nearly all the gulf's offshore oil and gas
production for over a week. Racing to restore operations, the
industry has brought about 60 percent of that back.
But even more crucially, it knocked off a dozen refineries at the
peak of summer demand, sending oil prices higher and gasoline prices
to inflation-adjusted records.
The events of the last two weeks have demonstrated how close to the
edge the country's refining system had been operating, even before
the storm. Because the last American refinery was built nearly 30
years ago - with only a single new one now in the works - the problem
is unlikely to disappear quickly.
As a consequence, even though crude oil prices have fallen back to
pre-Katrina levels, prices for gasoline, heating oil, diesel and jet
fuel are expected to remain higher than they were before the storm
for a much longer period of time.
"There is now a greater realization that we don't have much extra
capacity," said Edward H. Murphy, a refining specialist at the
American Petroleum Institute, a trade and lobbying group. "It doesn't
take a Katrina, but even a smaller event can create a dislocation in
the market. Disasters like this can give you a billboard on the need
to address this. We need more capacity."
The rapid run-up in oil prices over the last two years has translated
into a boon for refiners after many years of meager returns. This
year, the refining margin - the difference between the cost of buying
crude oil and selling refined end products - has exceeded $20 a
barrel, far above the long-term average of $6. That has meant record
profits for oil companies and refiners and above-average stock
performance on Wall Street.
With profits soaring, the nation's refiners are now being blamed by
many drivers and politicians for contributing to the run-up in
prices. Indeed, to critics of the industry, the higher profits are
evidence of a policy to intentionally limit refining capacity to
improve the bottom line.
"Oil companies have jacked up gasoline prices through a simple
mechanism: reducing inventories and refining capacity," said Jamie
Court, president of the Foundation for Taxpayer and Consumer Rights,
an advocacy group, whose views are widely shared by industry opponents.
"They are supposed to compete and bring the lowest price to
consumers," Mr. Court said. "But the truth is that a small number of
oil companies cheat by working together by artificially reducing
supplies."
But that argument misses the point, said Bob Slaughter, the president
of the National Petrochemical and Refiners Association.
"What's happened can be explained by the higher cost of crude oil,
the difficulties in building new refineries and the disaster that cut
right through the heart of the industry," Mr. Slaughter said.
Currently, four major refineries, owned by Chevron, Exxon Mobil,
ConocoPhillips and Murphy Oil, are either flooded or without power,
and are likely to be out of commission for several weeks, perhaps
months. Together, these refine 880,000 barrels a day, or 5 percent of
domestic capacity. "It's very significant," said Colm McDermott, an
oil analyst at John S. Herold Inc. The loss is equal to 1 percent of
the world's refining capacity. "It's a global market and that's
certainly enough to have an impact on a global level."
As many as 15 other refineries, also affected by the storm, are
resuming production, but some are still operating at limited capacity.
"There's going to be a lot of pressure on these people to get things
up and running and deal with the maintenance issues as they come up,"
said James W. Jones, a vice president at Turner, Mason & Company, a
refining consultancy in Dallas.
Many parts of the industry are recovering rapidly. The most damage
offshore was sustained by Royal Dutch Shell, which said Friday that
its production, usually about 450,000 barrels a day, would be down by
40 percent through the end of the year.
But even as oil and gas production returns in the gulf, the time that
it will take refineries to get back to full speed will be a key
factor in determining how long product prices will remain elevated.
Under normal conditions, because of the close proximity of volatile
materials, high pressure and fire, restarting a refinery is a
dangerous process that can take anywhere between three to seven days.
In the refinery, oil is heated to around 1,110 degrees Fahrenheit,
turned into vapor and then collected at various temperatures,
creating products that are further refined to remove impurities,
allowing for the production of gasoline, heating oil, diesel fuel and
kerosene.
For the four damaged refineries - three are in the vicinity of New
Orleans, and the fourth is in Pascagoula, Miss. - restarting will
involve a much longer process. First, power must be restored. Once
that happens, generators, pumps and other electrical equipment
flooded by brackish water will need to be dried out. Removing salt
sediments will add to the ordeal. Then the operators must check that
none of their main systems have suffered any structural damage before
firing them back up.
So far, none of the refineries have provided an estimate of how long
all that will take. In its latest report, Chevron, whose 325,000
barrels-a-day refinery is the largest of the four, said "it will be
days before a full estimate of damage is known or when operations can
be safely brought back online."
Most Americans now pay more than $3 a gallon for gasoline - matching
inflation-adjusted highs reached after the Iranian revolution in the
late 1970's and early 1980's and the equivalent, on a per-barrel
basis, to $126. Oil prices, which touched a high of $70.85 a barrel
last week, now trade around $64 a barrel, still about $20 short of
the record set in 1981.
"If we lose three or four refiners for two or three months, that
shortfall is going to be very difficult to make up," said William E.
Greehey, the chief executive of Valero, the nation's largest
independent refiner. "I don't know how anyone can blame it on us when
we've just had the worst natural disaster in the United States'
history."
The refining outages prompted an international response from
industrialized nations to send emergency stocks of oil and gasoline
to the United States to plug the shortfall.
But that is only a temporary solution to a crisis that has been
waiting to erupt for years.
Since the 1980's, the number of refiners in the United States has
been cut in half. From a peak of 324 in 1981, the industry has shrunk
to 149 as the smaller, less efficient and less profitable operators
once protected by price controls closed, leaving mostly larger
companies in place.
Refining capacity has fallen about 10 percent, to 17 million barrels
a day, while oil consumption rose by 33 percent over the same 24-year
period, to 20.8 million barrels a day.
Meanwhile, refiners have been increasing their skill in turning crude
into useful products; efficiency improved by 27 percent between 1981
and 2004. Still, the difference must be made up by direct imports of
refined products, with gasoline imports now at 1 million barrels a day.
As their numbers dwindled, most remaining refiners expanded their
plants and added equipment to process more oil. Many refiners now
typically run at 95 percent of capacity, a level that is dangerously
high and that has led to a growing number of accidents in recent years.
In March, for example, a blast at BP's Texas City refinery, the
country's third-largest, killed 15 and injured 170 people. The
company was blamed by investigators with the Chemical Safety and
Hazard Investigation Board for "systemic lapses."
Following the agency's recommendation, BP appointed an independent
panel last month to review the "safety culture" of its American
refining operations.
Only one project to build a new refinery is currently under way. For
the last six years, Glenn McGinnis said he has been struggling to
line up the permits, funding and oil supplies to build a refinery
from scratch in a remote patch in Southwest Arizona.
"The fundamental reason why there has not been a new refinery built
for years is really two reasons - economics and uncertainty," Mr.
McGinnis said.
Traditionally, the profit margin for refineries has averaged about 6
percent, a rate of return too low to encourage much new investment.
Added to that is the lengthy process involved in securing the permits
from state and federal agencies. "If you take permits, and
engineering, and building," Mr. McGinnis said, "you're talking about
a 10-year horizon from the time you decide to build to the day the
refinery is completed."
Another issue that has slowed expansion, refiners said, was the cost
of complying with environmental regulations set in the 1990's under
the Clean Air Act. The American Petroleum Institute estimates that
refiners have spent $47 billion over the last decade to meet carbon-
emission standards and low-sulfur regulations, with more investments
needed through 2007. That, refiners say, is money not spent to raise
capacity.
It has been cheaper to add refining capacity through acquisitions
rather than new projects. Valero recently bought Premcor for $10,000
a barrel of capacity, a price many analysts deemed high. But that is
well below the $16,000 a barrel that Arizona Clean Fuels, Mr.
McGinnis' project, expects to invest.
Elsewhere in the world, some oil producers are planning to build new
refineries. Saudi Arabia is one of them. "We cannot keep producing
oil with no refineries," Ali Al-Naimi, the Saudi oil minister, told
the industry newsletter Petroleum Argus a few months ago. "There is a
limit."
While helpful, such moves abroad would mostly serve to shift the
country's increasing reliance on foreign oil producers to a greater
dependence on refiners abroad.
"We are going to be importing more products," Mr. Murphy of the
American Petroleum Institute said. "That is a certainty if we don't
expand our capacity. But the problem there is that you've changed one
form of dependency for another."
Barnaby J. Feder contributed reporting for this article.
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