Refinery Bottleneck Puts Squeeze on Gasoline Supply

In the 1970s, when the federal government tightly regulated the oil market, federal policies encouraged construction of gasoline refineries. But deregulation in the first year of the Reagan administration allowed the oil industry and market forces to decide how many refineries were needed. As a result, the number of refineries and total capacity to produce gasoline in the United States peaked in 1981 with 324 refineries able to process 18.6 million barrels of crude oil per day. Today, with U.S. demand for oil more than 20 percent higher, refinery capacity is roughly 1.7 percent lower. Refineries operate near full capacity in the summer, leaving the nation’s fuel supply chain vulnerable to disruption, as in September 2008 when Hurricanes Gustav and Ike shut down most Gulf Coast refineries, and gasoline stations throughout the Southeast ran out of fuel. Refining historically has been the low-profit segment of the oil business, so the industry has had little incentive to build. Some economists believe the Federal Trade Commission made things worse by forcing oil companies to divest themselves of refineries when they merged with other oil companies. The smaller companies that bought the refineries often did not have resources to expand them. And, during the past decade, the Environmental Protection Agency (EPA) required refineries to invest $50 billion, according to industry, to meet regulations for cleaner burning fuels. Over the same time period, neither the EPA nor Congress did anything to force the auto industry to make more energy-efficient vehicles, which would have helped curb pollution and lessen the squeeze on refineries — and on wallets at the gas pump.

Follow-up:
Prospects for increasing U.S. refinery capacity are dim. The current economic slowdown means less demand for gasoline, easing the immediate pressure on refineries. Many refinery expansions have been put on hold, not only due to current financial woes but also because of legislation mandating more efficient vehicles and greater use of “renewable fuels,” mainly corn-based ethanol.

Photo credit: Environmental Protection Agency

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