Gas prices will remain volatile for years, national study finds

Friday, August 29, 2003

A growing appetite for gasoline -- combined with scant prospects for increasing refining capacity -- will keep fuel supplies and prices volatile in the coming decade, according to a Rand study being released Thursday.

California and other states that require special fuel blends to reduce air pollution will be especially vulnerable to shortages, according to the study, which was commissioned by federal energy officials.

The findings largely represent the views of oil-industry executives, who told researchers that they had little financial incentive to boost refining capacity. On the contrary, less competition and capacity in the refining business have contributed to higher profits, researchers found.

"Refiners suggested that there are opportunities out there for production expansions," said D.J. Peterson, principal author of the study conducted by Rand, a nonprofit research group in Santa Monica, Calif. But at the same time, he said, "refiners told us they no longer see an imperative to supply the market at all costs ... therefore, they no longer build in extra capacity."

One refiner quoted anonymously in the report said his strategy was to make "cheapskate investments" and rely on the existing plant and equipment as much as possible, even if that plan ultimately reduced the refinery's output of certain fuels. Another person in the business said, "the industry has learned that it's OK to fall short on product ... there is no reward for being long on product or production capacity."

In California, where no new refineries have been built in 30 years, government officials say the state's precarious supply-demand situation leaves motorists vulnerable to more frequent and higher spikes in pump prices.

Gasoline prices in California are in their second major ascent of the year, having jumped nearly 36 cents a gallon in the past two weeks, to $2.101. The statewide average hit a record of $2.145 for a gallon of self-serve regular on March 17.

Such volatility will likely hit with regularity in the future, and not just in California, refiners told Rand.

Authors Peterson and Sergej Mahnovski produced the report from interviews conducted between February and July 2002 with 72 executives from large and small refiners and companies that supply services and equipment to the companies. It was commissioned by the National Energy Technology Laboratory, an arm of the federal Department of Energy, to help the agency as it reviews government policies and programs that involve refineries as well as fuel and environmental regulations.

Many refinery executives complained that ever-changing regulations further discouraged investment in a business that was already challenging, risky and expensive. The number of U.S. refineries has declined from 324 in 1981 to 149 last year, according to the federal Energy Information Administration, although the ones still in operation are producing more gasoline.

California Assemblywoman Christine Kehoe, a Democrat from San Diego, held a hearing Wednesday to discuss the lack of competition in the gasoline market and said there was little lawmakers could do to boost refining capacity.

However, Kehoe has proposed a bill that would require California refineries to provide the state with detailed reports of imports, exports and inventories of fuel. She said such disclosure would give the public a better idea of the fuel supply situation, and shed light on oil-industry actions that are "sometimes at the cost of consumer benefit."

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