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September 7, 2005

Are you sure no one wants them in their backyard?

You may have heard some claim a lack of refining capacity is driving up fuel costs. They usually mention in the same breath that . Recently there has been a temporarily spike in gas prices due to limited refining capacity as Katrina knocked a about 10% of our refining capacity off line. However, that has little to do with why oil has been above 40 since last July. Ask yourself the following, given the power of the oil and driving lobbies, if tons of money were available in making oil into gas, wouldn't the oil companies have found a way to build more refining capacity?

At the time of this writing, oil at about $65 a barrel. Since the wholesale price of 42 gallons of gas is about $84 (@ $2 a gallon). So in this simple way of thinking about it, you get paid $19 dollars to make the oil in to gas. The financial markets talk about this in a more formal way, called the crack spread. The process of making refined fuels is called cracking. The crack spread on a barrel of oil in Texas is about $25. See the picture below for more details on a current quote. This is a huge spread. The average since 1992 (as far back as I could get data) is $4.13. Thought of another way, historically you get paid 10 cents a gallon to make gas from oil. As of today you get paid 60 cents. Since oil has jumped about 60 cents sine Katrina, that crack spread movement has been passed along to the consumer.

Historically, the cost of refining oil has consumed all the revenue from doing so. That is the real reason for lack of spare refining capacity. But, what about all those people unwilling to live near refineries? Surely that is a reason.

To that, I merely mention casinos and drugs. Only those that profit from or enjoy the products of these mixed blessings wants them nearby. Both are subject to legal sanctions limiting or eliminating their availability. Yet virtually everyone in America has access to an unlimited amount of both. Oil is legal and people use it to drive their cars and heat their homes. So they have constituency. We also have the space. The United States is ranked 145 out of 198 in least dense countries on earth. Our neighbor, Canada, is 185. Problem getting local approval? The Indian Nations, sovereign on their own land, dot the US and could build their own refineries, just as they've built casinos. We find space to build power plants, garbage dumps, highways, and other loud and unpleasant things. We have to face the fact that we aren't willing to pay for additional refining capacity and that's why we don't have any.

The Times has some interesting coverage on the issue.

Here is a great map to demonstrate how a surfeit of fuel blends is exacerbating refinery capacity problems.



Posted by OneEyedMan at September 7, 2005 2:38 PM


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