Aging refineries drive price at the pump

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Attention American motorists: It is not ExxonMobil or Middle Eastern oil producers who are driving the price of gasoline you pay at the pump.

It is shortages of gas and other problems at aging refineries in your neighborhoods.

While that has been true all year, oil analysts say, it has never been more obvious than yesterday, when the price of premium crude oil briefly hit a record $78.77 in New York trading even as gas prices continued to fall at the pump.

Gas prices have fallen from a record $3.20 a gallon in May to $2.86 yesterday afternoon, according to GasBuddy.com.

What drove oil prices briefly to a new high was news that refineries drew down their inventories of oil last week, leaving stockpiles stretched thin and raising questions about the adequacy of supplies. But the news was actually good for drivers, because it showed that more U.S. refineries are up and running after a rash of unscheduled outages this year, enabling them to draw down their oil stocks to make gasoline.

More plentiful gas is alleviating the pressure on pump prices seen earlier this summer when the need for maintenance and repairs at aging refineries left stockpiles at dangerously low levels.

"The refineries have finally gotten their act together," said Phil Flynn, an analyst at Alaron Trading Corp. "They're back to normal, almost." The Energy Information Administration reported yesterday that refineries are operating at 93.6 percent of capacity, the highest in more than a year.

American refineries are aging and prone to accidents and other problems that require extended periods offline to remedy. No new refineries have been built in 30 years, largely because Clean Air Act regulations make building new ones prohibitively expensive, oil analysts say.

Attempts by Congress to encourage new refinery construction through tax breaks and other enticements in recent years failed to produce the desired results. Most new refineries are being built in China, the Middle East and other countries where regulations are less restrictive. That has led to an increase in imports of gasoline as well as oil.

With demand for gasoline and other oil products growing by 1 percent to 2 percent a year in the U.S., domestic refineries are increasingly strained in the run-up to peak driving season in the spring and summer, when bottlenecks often develop that push up prices. But when evidence emerges that production is growing again, as it did yesterday, that can relieve the pressure on prices.

In fact, the revival of refinery output reported yesterday ended up outweighing worries about an unusually large, 6.5 million-barrel drop in oil inventories and caused a retreat in oil prices after they touched record highs in morning trading on the New York Mercantile Exchange. Premium crude for September delivery ended down $1.68 at $76.53 a barrel.

"As refining capacity returns, it alleviates shortages of gasoline," said Robbert Van Batenburg, oil analyst at Louis Capital Markets. He expects falling gasoline prices to continue to put pressure on oil prices and contribute to a significant drop in oil prices in the weeks ahead — a reversal of the historic trend of oil prices leading gas prices.

The rapidly approaching end of peak driving season usually ushers in significantly lower oil and gas prices. Last year, in the weeks surrounding Labor Day, gas prices fell more than $1 a gallon and oil prices plummeted almost $20, aided by the absence of major hurricanes in the Gulf Coast oil-producing region despite predictions of above-average hurricane activity.

So far, widespread forecasts of threatening hurricanes this year like the ones that devastated the Gulf Coast in 2005 also have failed to materialize, although the worst of the hurricane season still lies ahead.

Barring another destructive storm, Mr. Van Batenburg said he expects oil prices to fall significantly further. That scenario has been telegraphed by a reversal in the oil futures market in the past week that indicates the price of oil will drop in the months ahead. Markets previously were signaling a significant rise in future oil prices.

Most analysts expect oil prices, which account for about two-thirds of the cost of gasoline, to return to their historic role of driving gas prices at some point in the years ahead, particularly as rapid growth in demand for oil in China and other developing nations starts to create shortages of oil in world markets.

In the meantime, the outlook for new refineries in the United States — or even adding to the capacity of existing ones — remains poor, said Michael Canes, economic consultant at the Energy Policy Research Foundation.

"Consumers will benefit if additions to refining capacity keep pace with demand," he said, but "from a refiner's perspective, uncertainties abound."

The new Democratic leadership, rather than offering tax incentives and other enticements to build new plants, is enacting tax increases and other penalties, he said. A Senate-passed bill would punish suppliers of gasoline with severe fines for any purported "price gouging" during an emergency such as a hurricane.

Also clouding the outlook for refiners are vows by President Bush and Democratic leaders to cut oil consumption by 20 percent through stricter fuel-efficiency requirement on cars and trucks and greater use of ethanol — developments that would take years to carry out but still raise questions about whether new gasoline refineries are needed in the long run, he said.