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 majors̢۪ 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 capapcity—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 they̢۪ve increased production it has reduced the price of oil, and when OPEC has cut production in order to raise prices it̢۪s 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.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. New refineries for old military bases?

  2. herb says:

    I have heard over the past 1 1/2 years every excuse in the books to justify the rising price of gas, One week it was because of a refinery fire, the next week, it is high demand, next week, it is high crude prices, next week, it is the refinerys are peaked to capacity, Who knows what the excuse will be next month, 2 months from now and 6 months from now. All this time I see the majors quarterly reports of larger than ever profit increases. Doesen’t it seem strange that every gas station on the corner has the same price. That is either the oil companies all have the same refining costs or there is one hell of a lot of price fixing going on. And what does our glorious government officials say about it, Lip Service” and a bunch of empty promiseses. It doesn’t take a brain surgeon to figure it out. Exxon Mobile just posted a 47 percent increase in profits the last quarter. I think it is about time that Bush and his oil cronnies and the Dems. get their act together and quit screwing the people. But, what will we get??? More of the same lame excuses.

  3. McGehee says:

    Doesen’t it seem strange that every gas station on the corner has the same price.

    Where do you live? Gasoline prices in my neck of the woods vary considerably. However, it is true that two gas stations across from one another will keep their prices very close together, but there’s a word for that, Herb, which your econ instructor must have forgotten to tell you about:

    Competition.

    Neither gas station owner wants to lose customers because his price is significantly higher than the other guy’s.

    But no, I guess it’s easier to believe in a conspiracy where the price charged by two stations owned by completely different people and supplied by oil companies headquartered oceans apart, are determined in the boardroom instead of right there on-site by an owner who can freakin’ see what the other guy across the street is charging.

    Jeez. Hey Herb — here’s your sign.

  4. herb says:

    Wow: I have just heard another excuse to justify the high price of gas.