Oil Refinery Problems Play Role in Prices

U.S. oil refineries are operating at close to full capacity and are aging, vulnerable, overburdened and very difficult to replace. That means problems at a single plant can have an outsize effect, causing pump prices to fluctuate wildly.

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Crude oil prices hit record highs this week, putting pressure on those who refine the oil. U.S. refineries are operating at close to full capacity, and that means problems at a single plant can have an outsize effect, causing pump prices to fluctuate wildly.

NPR's Jason Beaubien explains why things aren't likely to improve anytime soon.

JASON BEAUBIEN: Valero Energy's refinery in Corpus Christi, Texas is a huge maze of pipes, pumps, distillation towers, heaters, coolers, catalytic cracking units, and various other industrial equipment. The four-mile-long complex sprawls along a shipping channel and can process up to 300,000 barrels of crude a day.

In the early days of the oil business, refineries simply heated crude in a big still. The lighter fuels rose to the top of a tower, gasoline condensed in the middle, and gooey asphalt was left at the bottom. But refining these days is far more complex.

Mr. MARTIN PARISH(ph) (Valero Energy Corporation): The big box you're looking at there is a large heater. There's also a lot of other components there.

BEAUBIEN: Martin Parish, vice president for refining operations for Valero, is standing in front of a towering industrial structure called an ola-flex(ph) unit.

Mr. PARISH: It's a catalytic process with a circulating catalyst. So that makes the isobutylene that we in turn feed to this unit to covert isooctane.

BEAUBIEN: Temperatures inside this unit range from 180 degrees below zero to 1200 degrees Fahrenheit. Isooctane makes fuel burn cleaner and with more power. It's a replacement for the now out-of-favor fuel additive, MTBE.

Parish says various regulatory changes have made refineries less flexible. For instance, in addition to Valero's new isooctane unit the company also just spent $100 million on a desulfurization unit to comply with new federal regulations.

Mr. PARISH: What we do with this is we take this sulfur down to less than 30 parts per million, which is the cap on sulfur and gasoline at this point in the United States.

BEAUBIEN: Before this unit went online, gasoline produced here contained roughly five times more sulfur per gallon. Parish says the new rules are good for the air, but they impose new burdens on refineries.

Mr. PARISH: Right now, if we lost the gasoline desulfurization unit, we would just have to cut rates, store what we could. We couldn't store it for very long. And we'd be almost out of the gasoline business until we got that unit running again. And that's really changed in the industry in the last few years with the lower amount of sulfur and fuels. Everything is more tightly constrained.

BEAUBIEN: Aaron Brady, with Cambridge Energy Research Associates, says a surging global demand for oil that began in 2004 has used up most of the spare refining capacity in the U.S.

Mr. AARON BRADY (Cambridge Energy Research Associates): Now whenever you have any unanticipated supply disruptions such as a refinery going down unexpectedly or a surge in demand or a hurricane, for example, you have big swings in gasoline and diesel prices as a result, because there is no buffer in the system right now.

BEAUBIEN: This year shows how vulnerable U.S. refineries are as fires, floods and industrial accidents forced a number of refineries to shut down. That helped push prices at the pump this summer above $3 a gallon. In addition, nearly half of the U.S. oil refining capacity is clustered along the Gulf Coast of Texas and Louisiana.

When Hurricanes Katrina and Rita battered this area in 2005, Valero had to close four of its refineries. Normally, there's only about a 20-day supply of refined gasoline in storage tanks, and Valero's Martin Parish says restarting a refinery after a devastating storm could take longer than that.

Mr. PARISH: When you have a Category 5 type storm come in, you're probably going to have some damage and probably going to have issues. Plus, you've got the human component of everybody's evacuated, everybody's got problems at home, and you need people to run the plant. So that's another, you know, issue that you have.

BEAUBIEN: While a new oil refinery hasn't been built in the U.S. in decades, several existing facilities have announced plans for major expansions. But it will be years before that additional refining capacity is available.

Jason Beaubien, NPR News.

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