Why no one else is making gasoline

[southsider2k5]

Its kind of interesting, but it never hit me that anyone can build a refinery, but NOBODY is actually doing it. Remember there is tons of money on the sidelines in private equity funds that is begging to be invested, and no one has applied for a new permit.

 

http://money.cnn.com/2007/06/05/news/econo...dex.htm?cnn=yes

 

Why no one's making more gas

Refineries are making money like never before, so why aren't more people getting in on the action?

By Steve Hargreaves, CNNMoney.com staff writer

June 5 2007: 5:25 PM EDT

 

 

NEW YORK (CNNMoney.com) -- Motorists must get tired of hearing how refinery problems are causing high gasoline prices.

 

In a free-market economy, if there really was such a shortage (most experts say there is), and refining profits are so high (any oil company earnings report will attest they are), then why aren't people building more refineries?

 

The oil industry has long said refineries are too expensive, too hard to get a permit for, aren't necessarily needed when the government is calling for a reduction in gasoline use, and take so long to build that gasoline prices could collapse by the time one comes online. Instead, they are boosting output through expansions at existing refineries.

 

Consumers don't necessarily buy this, instead thinking the industry is in cahoots to restrict supply and reap massive profits.

 

But it's not like oil companies are the only ones who could build refineries. After all, the technology isn't particularly complex. And with everyone from investment banks to insurance companies to private equity firms, chasing high returns in an era of low global interest rates, there's a ton of cash out there just looking for a place to go.

 

So why hasn't anyone plunked it down to make more gas?

 

The refinery shortage, cited by experts as a main culprit behind the recent record high gasoline prices of over $3 a gallon, has been a windfall for the oil industry.

 

Exxon Mobil (Charts, Fortune 500) made nearly $2 billion profit in worldwide "downstream operations," which include refining, in the first three months of 2007 alone.

 

The difference between what refiners pay for a barrel of oil and how much they can sell the products for, known in the industry as "crack spreads," has tripled in the last 12 months, according to Antoine Halff, head of energy research at Fimat in New York.

 

"Refinery profits have really been ballooning over the last few years," said Halff.

 

The cash bonanza has generated some interest.

 

"I get calls from everyone in the universe," said Peter Beutel, an oil analyst at the consulting firm Cameron Hanover.

 

But he said so far he hasn't heard of anyone building a new refinery.

 

A call to the Environmental Protection Agency, which is involved in the permitting process for new refineries and refinery expansions, didn't turn up any evidence of a new refinery permit. A spokesman there said refinery expansions are more likely, although the agency was still searching its database at the time of this article.

 

Louisiana, a state long friendly to oil and gas interests, is actively seeking a new refinery.

 

Marathon Oil (Charts, Fortune 500) has built a $3.2 billion refinery expansion, Valero (Charts, Fortune 500) has a $1 billion expansion, and the state is in talks with the Kuwait national oil company for a massive new 500,000-barrel-a-day facility, said Michael Olivier, secretary of Louisiana Economic Development.

 

But even in Louisiana, where Olivier said the Marathon expansion permit was approved in less than a year, no completely new refinery has been built nor are there solid plans for one.

 

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"I've heard a lot of people thinking about it," said Mike McKee, a Dallas-based director at KPMG corporate finance, the banking arm of the consultancy KPMG. "But it's a pretty daunting task."

 

McKee said investors outside the oil industry have the same fears as the oil firms, plus one other.

 

"Margins are better now than they have been in 20 years," he said. "But as an investor, you'd be looking at jumping in at a historic peak, and it gives you pause."

 

In short, investors, like the oil industry itself, are concerned that refining will one day revert to being a barely profitable business.

 

"These guys don't want to put money into a business that's historically cyclical," he said.

 

Over the last 25 years, McKee said the S&P 500 has generated percentage returns somewhere in the low teens, while refining has returned about half that.

 

"There's a good reason there's been some discipline in the capital markets," he said. "It's been a pretty tough story over a long period of time."

[kapkomet]

So no one wants to invest, because they expect the "windfall" to erase in the near future (buy low, sell high)? Well, in this environment, it won't happen. Too much demand. So when do we start the Soxtalk Refineries, LLC? There's enough s*** spewed around here, we wouldn't even need oil to refine, just good old fashioned bulls***.

[southsider2k5]

Which means they don't see this as a permanent shift in the demand curve, which really puzzles me, because I do. The factors for this shift aren't a temporary shortage like in the 70's, but a real life demand movement accross the board. I wonder if it is more to do with the PITA of getting a refinery done in the US today?

[EvilMonkey]

How hard would it be to build a refinery just over the border in mexico? They can pipe the stuff in, or it would be a short haul by truck or rail, mexico has lax enviro laws so it can probably be built fast, it would probably cost half of what it would cost to build here, even factoring in all the bribes you would have to pay and it would provide a few jobs for the area, maybe keeping at least a few people from crossing the border.

[mr_genius]

awwww, hell no

 

NO BLOOD FOR OIL!!!!!!1!!1!!!!

 

http://www.local6.com/automotive/13452051/detail.html

 

[Balta1701]

You know, I hate being one of those conspiracy folks, but this is one of those cases that just seems to say "There's something going on here" other than what is a cries out to my eyesctually written in the story. As 2k5 said, it seems like all of the forces are suggesting this is more than a cyclical rise, the profit potential should be enormous, and yet nothing is happening, which allows for a couple of other groups to cash in.

 

Of course, the peak oil concept could well be playing a part in here also, in that if people think oil production worldwide will be declining within a few years, then the point of building a new refinery is gone.

[vandy125]

You know, I hate being one of those conspiracy folks, but this is one of those cases that just seems to say "There's something going on here" other than what is a cries out to my eyesctually written in the story. As 2k5 said, it seems like all of the forces are suggesting this is more than a cyclical rise, the profit potential should be enormous, and yet nothing is happening, which allows for a couple of other groups to cash in.

 

Of course, the peak oil concept could well be playing a part in here also, in that if people think oil production worldwide will be declining within a few years, then the point of building a new refinery is gone.

 

There's always risks out there with jumping in to things like this. However, usually somebody is willing to do it.

Edited June 6, 2007 by vandy125

[southsider2k5]

There's always risks out there with jumping in to things like this. However, usually somebody is willing to do it.

 

The money potential is the motivating factor. People outside of the oil industry, don't give a s*** about the oil industries profits. If no one is willing to take this risk, there has to be a real reason why, outside of the usual grandiose of the oil companies controling the world.

[NUKE_CLEVELAND]

What's being overlooked here is that the major refiners are spending a lot of money to upgrade and expand their existing facilities. I guess it's just that much easier to expand what you already have than it is to try and build a new facilities.

[southsider2k5]

What's being overlooked here is that the major refiners are spending a lot of money to upgrade and expand their existing facilities. I guess it's just that much easier to expand what you already have than it is to try and build a new facilities.

 

For the people who are already refining, yes. But for the people who could be getting rich of it, who aren't oil execs, it makes no sense.

[jackie hayes]

For the people who are already refining, yes. But for the people who could be getting rich of it, who aren't oil execs, it makes no sense.

It depends what response they expect. If you expect that current refiners will expand their capacity if you enter the market (not an unreasonable expectation -- they can probably do so cheaper than you can), you won't bother opening it. That's why industries with large setup costs can maintain large profits indefinitely. Incumbent firms have an incentive to take short-term losses for the long-run gain. Knowing this, no potential entrant wants to make the investment. The only way to break it is to convince the current players that you will stick around no matter what sort of losses you see. That's a huge financial commitment (much, much larger than the mere cost of opening a refinery), probably larger than any investor can manage.

[NUKE_CLEVELAND]

Nobody else is refining because the entry process is WAY too costly and prohibitive. As is typical of Americans, they would rather whine about a problem (high gas prices) than solve it (see a new refinery built). As far as Im concerned I really don't have a lot of sympathy for people paying through the nose for gas. As is the case most of the time, this is a problem the public has brought on itself.

[NorthSideSox72]

Nobody else is refining because the entry process is WAY too costly and prohibitive. As is typical of Americans, they would rather whine about a problem (high gas prices) than solve it (see a new refinery built). As far as Im concerned I really don't have a lot of sympathy for people paying through the nose for gas. As is the case most of the time, this is a problem the public has brought on itself.

I agree, though I think we need to act short-term AND long-term. New refineries is fine, new oil is fine, but you also need to invest time and effort into longer term, non-oil energy solutions.