Big push on biofuel may keep prices up at pumps

WASHINGTON — A push from Congress and the White House for huge increases in biofuels, such as ethanol, is prompting the oil industry to scale back its plans to expand refineries. That could keep gasoline prices high, possibly for years to come.

With President Bush calling for a 20 percent reduction in gasoline use and the Senate debating legislation for increases in ethanol production, oil companies say they see growing uncertainty about future gasoline demand and little need to build or expand refineries.

Oil-industry executives say they no longer think the demand for gasoline over the next decade will warrant the billions of dollars in refinery expansions — as much as a 10 percent increase in new refining capacity — they anticipated as recently as a year ago.

"Why would I invest in a refinery when you're trying to make 20 percent of the gasoline supply ethanol?" said Peter Robertson, vice chairman of Chevron.

But Ron Lamberty of the American Coalition for Ethanol said the talk about biofuels threatening gasoline production is the "latest attempt to blame ethanol [for] Big Oil's failure to meet our energy needs."

"The ethanol industry continues to grow while oil refiners continue to make excuses for maintaining their profitable status quo," Lamberty said.

Biofuels and efforts to get automakers to build more fuel-efficient vehicles have been portrayed as key to countering high gasoline prices, but they are likely to do little to curb costs at the pump — today, or in the years ahead — if refiners reduce gasoline production.

Politicians frequently have blamed a shortage of refineries for the sharp price spikes in gasoline.

"The fact is that Americans are paying more at the pump because we do not have the domestic capacity to refine the fuels consumers demand," Sen. James Inhofe, R-Okla., said last week during debate on the Senate energy bill.

Hampered by outages, U.S. refiners could not keep up with demand this spring, and gasoline imports were down because of greater demand in Europe and elsewhere. Despite stable or declining oil prices, gasoline prices soared to record levels and remain well above $3 a gallon.

In the Seattle-Bellevue-Everett area, the average price for a gallon of regular Sunday was $3.15, according to AAA.

Consumer advocates maintain the oil industry likes it that way.

"By creating a situation of extremely tight supply, the oil companies gain control over price at the wholesale level," said Mark Cooper of the Consumer Federation of America. He argued that a wave of mergers in recent years created a refining industry that "has no interest in creating spare capacity."

Only last year, the Energy Department was told that refiners, reaping big profits and anticipating growing demand, were looking at boosting their refining capacity by more than 1.6 million barrels a day, a roughly 10 percent increase. That would be enough to produce an additional 37 million gallons of gasoline daily.

But oil companies already have scaled back those expansion plans by nearly 40 percent. More cancellations are expected if Congress passes legislation calling for 15 billion gallons of ethanol use annually by 2015 and more than double that by 2022, industry and government officials say.

"These [expansion] decisions are being revisited in boardrooms across the refining sector," said Charlie Drevna, executive vice president of the National Petrochemical and Refiners Association.

With the anticipated growth in biofuels, "you're getting down to needing little or no additional gasoline production" above what is being made today, said Joanne Shore, an analyst for the government's Energy Information Administration.

In 2006, U.S. motorists used 143 billion gallons of gasoline, of which 136 billion gallons was produced by U.S. refineries, and the rest imported.

Annual demand had been expected to grow to about 161 billion gallons by 2017, Drevna said. But Bush's call to cut gasoline demand by 20 percent, through a combination of fuel-efficiency improvements and ethanol, would reduce that demand below what U.S. refineries make today, he said.

Valero, the nation's largest refiner — producing 3.3 million barrels a day of petroleum product — recently boosted production capacity at its Port Arthur, Texas, refinery by 325,000 barrels a day. But company spokesman Bill Day said some additional expansions have been postponed.

"That's not to say we've changed our plans," Day said. "But it's fair to say we're taking a closer look at what the president is saying and what Congress is saying" about biofuels. He said there's a "mixed message" coming out of Washington, calling for more production but also for reducing gasoline demand.

"It's something that we have to study pretty carefully," Day said.

Sen. Byron Dorgan, D-N.D., said consolidation of the oil industry into fewer companies has left them with no incentive to expand refineries.

"It's a perverted system that does not act as a free-market system would act," Dorgan said. "If you narrow the neck of refining, you actually provide a greater boost to prices, which is a greater boost to profitability."