Econobrowser on Refining

Lynne Kiesling

James Hamilton’s got a really nice discussion of a new House energy bill. His discussion highlights some aspects of the business of oil refining that I didn’t go into in my recent WSJ Econoblog, the most important of which being that petroleum refining just isn’t that profitable, on average. This House bill is premised on the claim that we need more refining capacity.

Maybe. But he cites arguments that more capacity would not be sufficiently profitable to get the required ROI to make it worthwhile. One of the commenters also points out that more capacity for hurricane buffers will mean more idle capacity the rest of the time, which is a good point. I think that perhaps we don’t need more capacity, but that we need more distributed capacity. Think complexity theory. Concentration of refining capacity on the Gulf Coast does not lead to robustness in the face of natural disasters, even if it minimizes other costs. So a broader analysis of the costs of refining, taking into account the anticipated destruction and reconstruction costs, might make inland refineries on former military bases economically viable.

Also, for those of you who think that the “windfall profits tax” might not be a bad idea, consider this: BP announced that their third-quarter earnings would fall by $700 million because of Katrina and Rita damage.

3 thoughts on “Econobrowser on Refining

  1. Wouldn’t storing refined fuel be a lot cheaper insurance policy against terrorist, weather, etc., then building excess capacity.

    In your comments on electricity you are against the old pratice of building to meet peak demand,
    so wouldn’t this be similiar.

  2. I like the idea of spreading capacity around the nation so that these Hurricanes can’t knock out so much production. Good idea.

    Alas, that is not how things work in this country. Thanks to NIMBY, if there ever is another refinery ever built, more than likely it will be built on the Gulf coast. People down there are used to refineries and appreciate the benefits that they bring (jobs, jobs, and more jobs).

    Look at what has happened with LNG terminals. There are proposals for new LNG terminals all over the US (New England, Long Island, California, and the Gulf Coast). The only place where local opposition is not slowing down the new terminals is along the Guld Coast, where people all used to offshore rigs.

    Anyway, whats a good capacity reserve in any industry? 10? There is less spare refining capacity than that at this time. Seems like we could use another refinery.

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