When Alberta government officials recently disclosed a study to see if a new oil refinery might fit into the province's energy infrastructure, the news media gave it front-page treatment, demonstrating just what an important subject oil refining has become of late. Thanks, Katrina and Rita. Pain at the gas pump in the aftermath of the Gulf of Mexico hurricanes has generated a storm of opinion on what to do about the high prices, and refining capacity in North America has come under scrutiny as a result.
One widely quoted fact is that the number of refineries in the United States has been whittled down to just 148 from more than 300 in the early '80s. Democrats and newspaper columnists see a conspiracy in that “low” number, and it's been suggested that greedy domestic oil-company executives have purposely restricted new refining capacity to increase profits over the past decade. The Bush administration has also come under fire: critics suggest the debate around capacity is now being used as a smokescreen to slash regulatory constraints on the oil industry.
The decline in the number of refineries is only part of the story, though. “Refineries are constantly being upgraded and rebuilt,” says Cindy Gordon, refining manager with the American Petroleum Institute, an industry lobby group. “We add production capacity all the time.” In fact, Gordon says existing refining capacity has been increasing at about 1% a year over the past decade–the equivalent of one new mid-size refinery annually. “Over the long term, gas prices correlate with the price of crude,” she says. “That's the big reason for the increase in price.”
Whatever the reason for pricey gasoline, a rush to build new refineries may be on. The U.S. House of Representatives, by a vote of 212-210, passed a generally industry-friendly bill on Oct. 7. It would, among other things, allow former military bases to be used for refineries, move control of new refinery permit approval to the Department of Energy from the Environmental Protection Agency, allow refinery producers to sue for damages if local communities fight a permit and lose, and decrease the number of regional “boutique” fuels in the United States (special blends that complicate distribution) to six from more than 15.
Will Alberta be able to compete against a slightly less regulated U.S. industry? According to Cindy Goodyear, a spokesperson for Alberta Economic Development, the provincial refinery report builds on two previous studies done through a government-led task force with the goal of “adding value” to the resources produced in the province. “The Albertan heartland near Edmonton would be a perfect place for a new refinery,” says Goodyear. Which is true: not only would the refinery have a vast source of supply crude from the oilsands to process but, best of all, it would be located far from Gulf Coast hurricanes.
Another question might be whether the continental industry is ramping up billion-dollar projects that would result in a flood of capacity–and conflict with oil companies that operate globally. Shell Oil Co. president John Hofmeister recently weighed in, suggesting an expensive new refinery in North America, which is moving quickly to more fuel-efficient cars, would be a risky project if gasoline use levels off. As Gordon points out, there has been enough spare refining capacity on a global level to plug gaps in North American supply. “Have we been able to meet demand self-sufficiently in the United States? No. But we have reliably provided the energy Americans need,” says Gordon. “It's a very global market.”
Indeed, Richard Branson, CEO of Virgin Group, a company best known for its edgy marketing to sell everything from plane tickets to perfume, recently mused about entering the refining industry. We can only imagine what kind of spectacle Branson would come up with to mark the first litre of Virgin jet fuel. But the fact the flamboyant Brit is even thinking about it has to give one pause.