Supply and supply

Oregon Sen. Ron Wyden recently released documents showing that the oil industry in the mid-1990s was looking for ways to cut production at refineries and increase profits. It takes about four years to build a large refinery, so the industry’s activity then is of importance to gas and heating oil prices now, particularly so in light of recent comments from an expert at the American Petroleum Institute.

John C. Felmy is the chief economist at API in Washington. Not long ago he appeared before a House Agriculture subcommittee, which includes Rep. John Baldacci, to answer questions about the need for drilling in the Arctic National Wildlife Refuge. Rep. Baldacci wanted to know whether the drilling would make more refined oil available and, presumably, lower prices at the pump. After hearing testimony that U.S. refineries already were working at capacity, the following conversation ensued:

Rep. Baldacci: What good is it going to [do to] drill anywhere and produce oil anywhere if we don’t have the refining capacity to be able to bring it to market?

Mr. Felmy: Well, you are going to need to increase additional supply so that you can bring the price down. We are going to need to diversify our supplies, either domestically or abroad –

Rep. Baldacci: All right. Well, then let me ask you a question, if you are going to need to do both. Does the oil industry have plans to increase refining capacity at existing refineries or to build new refineries?

Mr. Felmy: At the current point, it is a very daunting process to try to expand existing refineries. We have been subject to a myriad of regulations that are complex, conflicting, and changing … If you look at the regulations that have come out affecting the refinery industry, you have had major regulations several times. That is very destabilizing and makes it an unattractive investment. However, if you do produce more crude oil in this country, it will – and worldwide – it will lower prices and improve the rates of return. But we are going to need help to be able to do that.

Rep. Baldacci: You see – and I appreciate the company line, but I understand also that it has been a situation where the production has increased. Today, when I looked at the future’s market on crude oil and sweet oil, it was at $26 and change. We almost had an energy crisis when it almost reached $40 a barrel, and it is $14 a barrel less today, but the prices haven’t come down. Now, there are people who have a lot less education that have been able to figure out that it is going up by telegraph and coming down by pony express.

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Why the retail prices didn’t come down when the price per barrel dropped is explained succinctly in a memo from Chevron in 1995 and released by Sen. Wyden: “A senior analyst at the recent API convention warned,” according to the memo, “that if the U.S. petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refining margins …” Another memo, from Texaco in 1996, said refinery overcapacity was the most critical factor facing the industry. Apparently, the industry listened. The higher prices aren’t about a lack of oil coming out of the ground but a deliberate consideration of limiting refining capacity.

White House officials with experience in the oil industry during the 1990s would be aware of the discrepancy between the industry’s lamentations about government red tape and its drive for profits. Aware and yet willing to accept these complaints. Does this mean the nation is likely to encounter more high prices and more false energy solutions in the future? Of course.