Consumption is Going to Stop Growing

Higher prices show that our insatiable demand for gasoline is catching up
with our willingness to produce it.
By Michael D. Tusiani

In today’s Washington Post:

Running On Empty –

Higher prices show that our insatiable demand for gasoline is catching up
with our willingness to produce it.
By Michael D. Tusiani

Wednesday, April 28, 2004; Page A21
The price of gasoline rose over the winter, but that was just the beginning
of an inevitable upward trend. Summer will give us an even better feel for
things to come. Complaints by motorists and accusations by politicians will
not avoid the unavoidable: Most Americans simply cannot have all the
gasoline they want much longer.
We already burn more of this precious but cheap commodity than U.S.
refineries can make. For the past two years, imports climbing toward 1
million barrels per day have kept supply in step with consumption. But
within three years, we’ll be extracting as much from foreign suppliers as
they can spare. At that point, demand cannot continue to grow at the current
pace. It cannot exceed supply.
When demand hits the ceiling, some of us, or all of us, will use less.
Government may impose a rationing scheme (which seems unlikely) or price
will allocate supply. Those who can afford it will get as much as they want.
Others will not.
For some reason, America’s politicians and special-interest groups never
mention the limits of oil companies’ capacity for making gasoline. The
domestic refining industry has not grown significantly for years, and it
will probably shrink in years to come. Plant emissions rules, community
hostility and a series of money-wasting betrayals by regulators discourage
expansion. So does the burden of paying for equipment to make fuels that
comply with clean air rules for a marketplace so competitive that
investments do not earn any money. Worse yet, these conditions encourage
closure of marginal facilities. Many consumers say they won’t cry for the
big, rich oil companies. If so, they’ll cry for themselves in the gasoline
line — or leave the keys in their SUVs, hoping they’ll be stolen.
America burned 8.93 million barrels of gasoline a day in 2003, 8.14 million
barrels of it produced by domestic refineries. If U.S. refineries operated
at peak gasoline output despite seasonal swings in motor fuel sales, they
might sustain 8.7 to 8.8 million barrels a day of production, assuming their
equipment could take the stress. In years to come, regulations, among them
the measures that force ethanol into the motor fuel supply, will reduce the
amount of gasoline refiners can make.
Meanwhile, if nothing changes our living patterns and taste for large,
inefficient vehicles, demand will continue to rise. We buy more thirsty SUVs
than thrifty sedans. Over the past five years, that preference has driven
gasoline consumption upward an average of 1.6 percent per year. Such a pace
will push demand to 9.2 million barrels a day in 2005 and 9.4 million in
2006.
Most foreign refineries are unable to make gasoline that is suitable for
sale in the United States. They simply do not have the equipment to turn out
a product that meets our specifications. The latest elevation of our
standards — which will quickly reduce the sulfur content of our motor fuel
to practically zero — severely restricts the amount of gasoline we can
import from such traditional suppliers as Venezuela. Asia, the only place on
Earth where the refining industry still expands rapidly, does not install
the expensive deep-desulfurization equipment required to meet our standards.
Today only one overseas refining system, Western Europe’s, can increase its
output of sulfur-free gasoline. But Europe, like the United States, will not
significantly increase its capacity to produce gas. European oil companies
have neither the capability nor the incentive to expand their
gasoline-making hardware. In three years or less, if U.S. gasoline demand
grows as expected, they will produce to their maximum, provided we pay
enough for their commodity. Then our real trouble will begin.
Let me stress an essential point. We must not pretend that a supply increase
can save us. Even if public opposition and economic impediments to refinery
expansion should disappear today, the oil industry could not install new
equipment fast enough to prevent a shortage two or three years from now. No
company can order the major process hardware to make gasoline — pipe
stills, catalytic crackers, alkylation units, cokers and reformers — off
the shelf. It takes three years to build and install those big, costly,
complex units. Add another year for design, engineering, bidding and
funding. In the real world, securing operating permits would entail anywhere
from a year to as long as it takes for one to lose hope.
Meanwhile, a few companies are taking risks that will soon pay handsome
rewards. They are systematically acquiring any fairly priced or underpriced
U.S. refining assets that come on the market, of which there have been a
number in recent years. Almost every time there is a merger, the Federal
Trade Commission mandates the disposal of a refinery or two. When a wayward
natural gas company has to raise cash to remain solvent, it sells
refineries. A few companies with vision are always eager to buy.
Why do the consumer protection lobby and the environmental pressure groups
say nothing about this real and urgent problem? They must see a gasoline
shortage coming. Do they want it to occur? One of their favorite legislative
goals, higher mileage standards for automobiles and light trucks, could
soften the collision between gasoline demand and supply.
In one way or another, consumption is going to stop growing. The only thing
we can control is how hard we hit the supply barrier. We can strike it
head-on or at an angle. An early warning could allow people of moderate
means to buy efficient vehicles instead of gas guzzlers in time to make a
difference in their mobility and personal finances. Whether they have to pay
$3 per gallon or carry their ration books to the filling station, they’ll
thank whoever gave them timely advice.
Our leaders, who have debated energy policy for years without acknowledging
any concern for a potential gasoline shortage, must now demonstrate courage
and vision. They must admit that the nation’s gasoline problem has no
practical supply-side answer and lead us toward reducing consumption.
The writer is chairman and chief executive of Poten & Partners Inc., which
provides brokerage and consulting services to the oil, gas and maritime
industries. He is a senior fellow at Columbia University’s Center for
Energy, Marine Transportation and Public Policy.
C 2004 The Washington Post Company