Environmental Regulations, Oil Refineries & the Price of Oil
In the comments to this post, Praktike points to this page at the National Resource Defense Council which argues the following,
Rolling back pollution protections, as some advocate, to allow refinery expansions is also not the answer. Although refinery capacity is a factor in today’s higher gasoline prices, environmental regulations are not the reason for tight refinery capacity, according to the DOE, the Environmental Protection Agency, the General Accounting Office, and even oil industry executives.
I have to wonder about the sources of this claim. After all this webpage at the Energy Information Administration says the following,
The impact of environmental requirements on the profitability of the majorsÃ¢€™ U.S. refining/marketing operations appeared to remain substantial after 1995. Actual operating ROI averaged 58 percent of the value of operating ROI excluding the effects of environmental requirements, over the 1996 to 2001 period (Table 4). That is, actual profitability was 42 percent below the estimated level of profitability without environmental compliance.
In other words, environmental compliance hurt profits. Lower profits and you’ll have fewer firms in the industry.
Commenter spencer wrote the following,
If you index the price of gasoline and the price of crude oil over the last 20 years the ratio of the two measures has varied from a high of 100.25 to a low of 99.75. In other words over the last 20 years using monthly data for crude and gasoline there has been no significant change in the price of gasoline relative to the price of crude oil. The data on monthly gasoline prices published by the Department of Energy does not show any big spikes in the price of gasoline that was not explained by higher crude prices.
A link to this data would be really nice. For example, this page at the Energy Information Administration (a sub-agency to the Department of Energy) has the following answer to the question “Why do gasoline prices fluctuate”,
Even when crude oil prices are stable, gasoline prices normally fluctuate due to factors such as seasonality and local retail station competition. Additionally, gasoline prices can change rapidly due to crude oil supply disruptions stemming from world events, or domestic problems such as refinery or pipeline outages. –emphasis added
This seems to contradict what Spencer has written. Then there is this pdf from the EIA which also calls into question spencer’s claim. In particular is this comment from page iii of the executive summary,
In contrast to some past nationwide gasoline price spikes, crude oil prices changed little in August and, thus, did not add to the late-summer gasoline price increases.
This there seems some reason to doubt spencer’s claim that (big) price spikes are everywhere and anywhere the result of spikes in the price of crude oil.
spencer also has this comment as well,
Over the last 20 years most existing refineries have been rebuilt in place in a way that expanded capacity. The Federal Reserve use to publish data on refineery capapcityÃ¢€”but quit when they revamped the IP data. But when the data was available it showed refining capacity growing at about a 1% rate, or about the same rate as the growth of demand .
However, if over the last 20 years refineries have been operating at close to capacity this new 1%/year probably wouldn’t be enough to prevent problems when there are problems with refineries such as un-planned maintenance.
So this idea that the limited refinery capcity and environmental regulations are part of the issue strikes me as highly questionable.
Commenter John Thacker also responded to my comment about OPEC’s increases in supply not having much impact on prices.
Umm, no. When theyÃ¢€™ve increased production it has reduced the price of oil, and when OPEC has cut production in order to raise prices itÃ¢€™s raised prices.
However, prices right now are currently quite high, and what do we see in the news?
Oil prices remain high despite Opec producing more than it is being asked for. The group’s output remained well ahead of the energy watchdog International Energy Agency (IEA)’s “call on Opec” both in 2004 and 2005.–link
Producers from the Organization of Petroleum Exporting Countries (OPEC) said this week they were doing all they could to fully supply the market in a bid to cool prices.–link
Lately all that I seem to hear in regards to OPEC is that production is high, production will increase, etc. and yet prices stay high. One way to explain this is that demand is rising faster than supply and even with production increases by OPEC and other countries the price of oil doesn’t go down much if at all.
Update: This article from Bloomberg indicates that the price of oil has closed substantially down today and the reason is the expected increase in oil production from OPEC. I’ll wait to see if prices stay low given the production increase. Right now I’m skeptical it will mean much.