Last week, we editorialized:
There has not been a major new oil refinery built in the United States since the Marathon Garyville Refinery was built in Louisiana in 1977. True, our existing refinery capacity is higher today than it was 30 years ago, but all that refining is being done at 137 refineries today, versus 254 refineries 30 years ago.
Fewer refineries means more miles of pipe must be built and maintained, and it also means bigger problems whenever a key refinery goes down. That is exactly what happened this fall in California, when the Richmond Exxon refinery caught fire and the Kettleman-Los Medanos pipeline was contaminated. With two key delivery system points at reduced capacity, and without other refineries and pipelines to back them up, gas prices shot up almost a full dollar from $3.73 in the first week of July to $4.65 today.
In other words, Californians are now suffering at the pump because they have let their energy infrastructure become too fragile. Instead of developing the resources closest to them (including the more than 300 million barrels of oil sitting off of California’s coast in the Pacific Ocean), California has chosen to become dependent on other states for its oil supply. And instead of building a diverse group of smaller refineries and shorter pipelines, California relies on a big dog that can suddenly take ill.
Today, The Los Angeles Times reports:
The Golden State’s gasoline market is essentially closed. The state’s strict clean-air rules mandate a specially formulated blend used nowhere else in the country. Producers in places such as Louisiana or Texas could make it, but there are no pipelines to get it to the West Coast quickly and cheaply.
Shielded from outside competition, these refiners benefit from keeping supplies tight. Even as gasoline consumption has declined in California in recent years because of high unemployment and increased vehicle fuel efficiency, refiners have been able to keep prices about 35 cents a gallon higher than the rest of the country. At the same time, the number of refineries operating in California has declined to just 14 today from 27 in the early 1980s.
In other states, such as Texas, independent, non-branded stations make up as much as 50% of the market, creating more competition. But California’s independent stations are the first to suffer when there’s a hiccup in the state’s fragile supply chain.
As the number of refineries shrinks, the chances that an outage could create disruptive shortages and painful price hikes increases.
“The fragility of the refining system makes California really vulnerable to spikes,” said Carl Larry, president of consulting firm Oil Outlooks & Opinions. “What happened this month looks like the result of a hurricane. But there are no hurricanes in California.”
Back to our editorial:
Americans will face a choice this November. They can go down the path California has chosen, a path of less oil development, fewer refineries and higher gas prices. Or they can let the market build a robust energy infrastructure that will create thousands of construction jobs now and keep energy prices low for decades. Depending on the choice they make, $7 gas could really be just four more years away.