Sign in / Join

Some facts on regulation, refining, & gasoline prices

No new refinery has been built in the U.S. since 1976. Although expansion of existing refineries increased capacity through 2002, capacity is unchanged since. Demand for gasoline continues to rise, but regulatory mandates have forced investments in "clean fuel expenditure" and inhibit investment in new capacity, according to this story in the Houston Chronicle. "The U.S. refining industry could spend as much as $20 billion on meeting all types of regulations this decade, predicts Bob Slaughter, president of the National Petrochemical and Refiners Association. Depending upon size, this could be enough to build a half dozen refineries."

Given the shortfall in refining capacity, the U.S. has resorted in recent years to increased imports of refined gasoline. But this source is also being checked by regulation.

The United States needs 1 million barrels per day of gasoline imports during the summer just to keep the cars and trucks rolling .... Over the course of a year, imports amount to about 10 percent.

But even that source of supply has its environmental problems. Regulations that went into effect on Jan. 1 are keeping the equivalent of 150,000 barrels per day out of the country. Gasoline imports for the year to date are down about 6 percent, the equivalent of about 50,000 barrels per day.

Much of the 150,000 barrels has been coming from suppliers such as Russia, Turkey and South America, where refineries aren't set up to produce the lower-sulfur fuel that is now required.

My sense is that conditions in the gasoline market will get much worse before they'll get better. And the culprit is environmental regulation. Consumer anger at gasoline prices is usually focused on "greedy oil companies." How will consumers respond when they realize that environmental regulations are responsible for high prices?

To be sure, there are many factors at work in the gasoline market. Crude prices are up. Energy demand in China is growing inexorably. OPEC production decisions are paramount. But if more severe environmental regulations in the U.S. play an important role, U.S. gasoline prices should have risen relative to prices in the rest of the world. That's testable, and my hunch is its correct. The Knowledge Problem has a series of posts for those interested in more information on this topic.