Tuesday, July 24, 2007

Many on the right complain about environmental regulations as being a primary reason for supply constraints in the oil refinery industry. To some extent it's true that many companies would rather not build at all than do so and comply with environmental code. But also by taking a pass on expansion, companies knowingly realize they're constraining supply and thus boosting price (and thus profits).

On Sunday, the NY Times had a front page article on this topic.
The disruptions are helping to drive gasoline prices to highs not seen since last summer’s records....American refiners are running roughly 5 percent below their normal levels at this time of the year.
After Hurricanes Katrina and Rita disrupted the nation’s energy lifeline two years ago, oil companies delayed maintenance on many of their plants to make up for lost supplies and take advantage of the high prices. But, analysts say, they are now paying a price for deferring repairs....As a whole, refining disruptions have been considerably higher than in previous years: they averaged 1.5 million barrels a day in the first quarter, compared with 700,000 to 900,000 barrels a day from 2001 to 2005.
So the rate of disruptions has doubled from the average rate in 2001-2005. And whereas in the story it is said that "refiners have been scrambling to meet a raft of environmental regulations," the key question is to what extent is routine maintenance being delayed versus that of needed improvements to meet new regulations? It sounds as if not just the latter is getting put off but both the former and the latter.

Yet the right doesn't mention this frequent choice of postponing routine maintenance repairs to in part keep supply tight, thus inflating price. It's called greed, and now everyone is paying for it.

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