July 12, 2008

Plans To Close Six Large Refineries Under Way

This is the first year in recent memory that high gasoline prices aren't being blamed on limited refinery capacity. In years past gasoline demand was higher than the amount of gasoline that refineries could put out especially during the summer driving season. This limited refinery capacity helped to boost gasoline prices and allowed refiners to run higher margins.

According to the EIA the refinery margin for gasoline in May 2008 was 10%. Compare that to 27.9% for May 2007 and 21.9% for May 2006.

As you can see limited refinery capacity helped push up prices in the past and now the opposite is true. Refinery margins are down and have been below historical standards for some time.

It is easy to see why the oil companies and refiners would want to lower the amount of fuel on the market. And closing the equivalent of six large refineries would certainly help boost refinery margins and gasoline prices.

This would be a good move for the oil companies, but bad for consumers.

But the situation is more complicated than some oil company executive deciding to close down some refineries. Instead to be able to close these refineries they need your help to do it. That is because these refineries aren't oil refineries and don't produce gasoline, instead they produce ethanol.

The price of oil rose more than 100% during the past year, but gasoline is up less than 50%, with refiners absorbing the difference in the form of lower margins. The addition of ethanol into the fuel supply has contributed to weak gasoline margins. Mandated ethanol use in the U.S. is now almost 600,000 barrels per day (bpd), which is about 6% of gasoline demand or the equivalent of about six large refineries' gasoline output. (Source)

If the attacks on ethanol succeed in limiting ethanol production you can bet that we will miss it's contribution in lowering gasoline prices.

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