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Gas Prices: The Refinery Myth

May 21, 2004

Like many of you, I have been wondering exactly what is going on with gasoline prices in the US. In my home town of Seattle, we have exceeded $2.30 a gallon and there is no sign the price will be dropping anytime soon.

So what is going on?

The problem we have been told is the fact that OPEC has jacked up prices and that we have a lack of refineries to produce enough gasoline. The refineries are working at 100% capacity, but demand is outstripping supplies. In addition, there is serious fears we are running out of oil. Because of this, we're facing record prices for gasoline.

I finally had a talk with a friend who works in the refining industry and asked him what is going on. Here is his take on the refinery part of the equation.

While it is true that gasoline refineries are operating at full capacity, they are not producing as much gasoline as they could.

A modern refinery works like this. Crude oil goes and and depending on the switches they throw or the heating elements they turn on, crude oil can be changed into a number of products on the fly. Home heating oil, diesel, jet fuel, kerosene or gasoline or other products such as pure carbon, used in steel. All of them are easy to produce.

The refineries in the United States are capable of producing an amazing amount of gasoline. In fact, in a few days time, we can produce enough gasoline to end any semblance of a shortage. They can do the same thing for heating oil or jet fuel.

Right now, most refineries are operating at 100% capacity and producing about 19% oil. The majority of the product being produced right now is home heating oil. This is to make up for the depleted stocks over the long cold winter. The refineries in my area, places my friend has been to in the last week are producing mostly carbon in the Cokers. The refineries could easily produce more gasoline, but why? That would drive the price down. Why ruin a good thing?

The US gets 70% of it's oil from resources other than OPEC. We produce lots of oil domestically in California, Texas and Alaska. The cost to pump that oil has not changed, just the cost that the oil is sold at on the futures market. This means that a company like ARCO owns and oil field, they are not paying any more money to run it through their refinery. It has the same cost. When they sell it as gasoline, again it has the same cost. But they can sell it now at record prices. It might explain why oil companies like ARCO or Chevron/Texaco posted record profits last quarter.

Obviously a price hike from OPEC would affect the price of the last 30% of the oil we purchase. With those cost raises in place, it should cost us 50 cents more per gallon, not 75 cents per gallon that I have seen at the pumps.

Something to think about.

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