Shell Oil Co. President John Hofmeister said consumer preferences for higher-mileage vehicles could slow oil and gasoline demand in coming years and lessen the urgency to build significant numbers of new refineries in the United States, according to Kevin G. Hall of Knight Ridder News Services:
"Hofmeister told Knight Ridder Newspapers that efforts by President Bush and Congress to provide incentives to build new refineries are welcome, but a key assumption -- that the demand for gasoline will continue to increase -- could be flawed. Hofmeister said the growing consumer demand for cars and trucks that get better gas mileage could change the outlook for future gasoline use."
Is he looking a gift horse in the mouth, and/or telling Bush that the Republican energy plan is flawed?
Continued below.
"I would submit the likelihood of consumption patterns changing is higher, rather than lower," Hofmeister said, suggesting the change would take some of the pressure off the need to build new refineries.
US refinery capacity was 17.9mbd in 1981 coming from about 300 refineries. Today it's 17.1mbd from 148 plants. US consumption is nearly 21mbd; imported fuel makes up the difference. So why is it that no new refineries have been built in the US since 1976? Is it really due to those pesky environment regulations that Republicans like to blame? Or do the oil companies agree with Hofmeister?
Hofmeister questions the long-term demand forecasts, pointing to the recent bout of record-high oil and gasoline prices that he thinks could mark a turning point.
"That really shifts the attention of the automotive industry to look for more fuel-efficient alternatives," Hofmeister said.
But could it be that Hofmeister wants to limit refinery capacity to keep prices up? Green Car Congress points out that:
It might be easy to dismiss Hofmeister's comments as self-serving; if production does not increase, but [if] demand does, then gasoline prices will continue to rise. However, the higher prices rise, the greater the likelihood of radical changes in consumer behavior.
As the sales of SUVs and larger cars decline -- and remember that some 40 percent of oil in the US is used by motor vehicles -- will new refineries be profitable? And there are many other factors that may drive down demand.
New cleaner diesel is coming to the US market next year and many expect a surge in cleaner and far more efficient European-style diesel engines. And I can tell you, having driven a Renault Modus diesel in France for six weeks, their economy, smoothness, and drivability is nothing short of amazing. American drivers will quickly grow to appreciate them.
Then there are the new hybrids that virtually every manufacturer has expressed an interest in building. The car shows are awash in prototypes.
Alternative fuels such as synthetic (coal-to-gas), ethanol, and bio-diesel will continue to take market share, lessening the demand on refineries.
Fuel economy standards are almost certain to increase, particularly if Democrats make gains in upcoming elections. And there is the possibility of increased fuel taxes.
Finally, it would take at least four years for any new US refineries to come on line since refinery construction in China and Saudi Arabia has tied up specialized resources.
The Philadelphia Enquirer has more of Hofmeister's views on reduced demand:
And that makes oil executives more cautious about plunking down billions on new refineries, which historically have provided lower rates of return than exploration and production of oil. It also calls into question efforts by Congress to make military bases and federal lands available to build refineries.
Hofmeister said that, even with incentives, Shell isn't planning a new U.S. refinery. Shell prefers to expand current refineries such as its joint venture with the Saudi state oil company in Port Arthur, Texas.
Asked if the emergency legislation proposed in Congress would bring about more refineries, the Shell executive answered with this question:
"Does the energy legislation promote refining-capacity increases predicated on current consumption patterns, or will the emergency legislation allow us to adjust refining capacity to changing consumption patterns?"
It's also possible that the oil companies are not building refineries because they calculate that peak oil will limit available crude oil and increase cost before the refineries pay for themselves. Let's face it: the oil companies know more about the semi-secret numbers on available reserves than we do. Bear in mind that parent company Royal Dutch Shell is the third largest publicly traded oil company and has seen profits grow 94 percent since 2002. These guys are not novices.
Were Shell to build a new refinery and crude prices continue to rise, demand would likely fall. So unless crude prices remain low and demand remains high there would be no incentive to build a new plant. Now consider that oil companies can only speculate about future demand, but they have intimate knowledge of reserves. In other words, if the oil companies are certain that increasing demand cannot be met without large price increases, and assume continued price increases will drive down demand, it would be senseless to invest in new refineries. Expanding existing refineries temporarily would be a better bet.
But there are some who would like to make building refineries so cheap and painless as to convince oil companies to ignore their better business sense. That's what the fight on the House floor last Friday over H.R. 3893 was about. The Associated Press described it thusly:
The House narrowly approved a Republican-crafted energy bill Friday aimed at encouraging construction of new refineries, although opponents said it would do nothing to ease energy prices while handing unneeded benefits to a profit-rich oil industry.
That was the vote where Republicans extended a 5-minute vote to 46 minutes while Delay strong-armed two of their own to changed their votes. Meanwhile Democrats yelled "Shame! Shame!" "Is this the House of a banana republic?" yelled Rep. Henry Waxman, D-California. Not a single Democrats voted for the legislation. Democratic Leader Representative Nancy Pelosi of California said:
"This bill includes all the special favors to the energy industry that were too extreme to be included in the energy bill passed by Congress less than three months ago."
"Refinery companies have deliberately closed and consolidated their facilities to drive up profit margins. They are making enormous profits... Do the American people really believe the right response is to waive environmental laws, brush aside state and local authorities, and open up federal lands to new refineries? Of course not. But that is the Republican approach: greed over need."
We might dispute Rep. Pelosi's contention that industry consolidation was done strictly to increase profits. But there is no doubt that environmental laws were crushed. The Natural Resources Defense Council says the effects of H.R. 3893 include gutting the Clean Air Act, limiting use of cleaner vehicle fuels, extending air pollution clean up deadlines, and curtailing judicial review and environmental oversight.
So is anyone willing to take the GOP up on this offer and build a brand new refinery? I've only read of one taker. According to another article by Kevin G Hall:
Kuwaiti Oil Minister Sheik Fahd al-Sabah told the White House in September that he'd build if the process could be simplified. The offer remains on the table, according to officials in the Washington office of the state-owned Kuwait Petroleum Corp.
Once again we see whom Republicans are looking out for. But that's hardly surprising.
The real lesson here might be that Shell oil does not believe that there is any way gas prices are coming down over the medium term, if ever.