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the price of fuel

Gas prices keep rising and get to be quite high, at least according to American standards. In 2001, gas cost around $ 1.30 per gallon, which by 2004 had risen to some $ 2.00. In Florida, gas now costs around $ 3.00 per gallon, and diesel sells on average at $ 3.30 per gallon. However, in Belgium gas costs 1,52 € per liter, which is equivalent to 7,48 $ per gallon...

Apart from the price of crude oil, which is a story in itself, the weirdest stories about the reason for these increases do the rounds in the media. The causes that are traditionally cited are severe winter, large demand, the requirement to maintain very large strategic oil stocks, an accidental and/or temporary lack of refining capacity, etcetera... Let's have a closer look at the refining capacity.

American refineries

According to the Energy Information Administration, the US oil consumption is about 18.7 million barrels per day. To satisfy that demand, the US imports 9 to 12 million barrels of oil per day. Figures about US refinery capacity are much harder to find, but they can be estimated at around 15 million barrels per day. Which is totally insufficient to satisfy the demand, so refined oil has to be imported at a higher price.

Every winter, several refineries seem to close down at the same time for maintenance and renovations. The most important culprit here is metal corrosion from water, hydrogen and sulfide, and all the pipes and fuel conduits have to be cleaned regularly. The remaining refineries obviously refine heating oil first, and vehicle fuel only comes in second place. Why so many refineries have to close at precisely the same moment, and why this has to be done in the middle of the winter, normally the busiest season, remains a mystery...

antique fuel pump...

graph of average fuel prices

Insufficient refining capacity

High demand and low supply obviously makes for a higher price. But why is there a shortage in refining capacity ? No major new refinery has been built in the US since Marathon's Garyville, Louisiana facility in 1976, and more than half the refineries that existed in 1981 are now closed !

Industry experts say that no new refineries are likely to be built in the US, even though the present refineries are running at 100 % of capacity, and gasoline shortages are beginning to crop up. Plenty of oil is being pumped and shipped to the USA, but the Seven Sisters (the seven largest oil companies in the world) point an accusing finger at the US government, and say that the lack of refining capacity is entirely caused by their legislative and environmental interference.

Why are there no new refineries in the US or Europe ?

1) Refineries are not particularly profitable : the cost of building a new refinery can be estimated at three billion dollars. But almost the same amount will have to be spent in the future, to further reduce the sulphur content in gasoline and other fuels, which is a regulatory choice. Refining margins are traditionally much lower than crude production margins. Given the ever tighter (political) regulations in industrialized countries about reducing carbon emissions and the climate change, refining is destined to remain a money-losing business.

2) Environmentalists fight planning and construction : a company proposed building a refinery near Portsmouth, Virginia, in the late 1970's. Environmental groups and local residents fought the plan tooth and nails, and it took almost seven years of legal battles, in courts and with federal and state regulators, before the disgusted company finally cancelled the project in 1984 !

3) Extensive Red Tape : approval from all imaginable federal and local government agencies could mean having to collect up to eight hundred different permits...

Refineries elsewhere

New and massive refineries in East Asia, India and the Middle East have already begun to flood the market at significantly lower cost than older facilities in North America, Europe and Japan. These new plants use scale and advanced technology to achieve significantly lower costs than older western competitors.

It costs American companies less to buy elsewhere, they avoid investing a considerable amount of capital, and they can charge the higher cost to the end-user anyway... I believe they call this technique "outsourcing"...

an "old" refinery a new refinery in Vietnam
traditional refinery
new refinery in Vietnam

Other and fiscal considerations

Another completely unmentioned, if rather important factor is the financial speculation on a tremendous scale by oil companies, banks, brokers, traders, pension funds, and whatnot. This boosts the price of fuel far above its normal value. The cargo of fuel in an oil tanker changes ownership sometimes up to 26 times during its passage from the loading dock to the port of destination . It was prudently estimated that the premium of this speculation can run up to $ 15 per barrel !

A last consideration is that not only oil companies and financial institutions benefit from higher fuel prices. The government's income is also "fueled" by them (if you'll forgive the pun), which is most welcome with heavy war expenses and huge debts...

As an example, a few years ago, the Belgian Department of Public Finances came up with a most creative "ratchet system", to compensate the poor Belgian government for its loss of income due to a concurrent decline of oil prices and the euro-dollar exchange rate. Ever so often, a lower "click" wouldn't be passed on to the consumer, but it would entirely disappear into the bottomless pockets of the administration. Needless to say, the "ratchet" only worked one-way, and when oil prices started going up again it suddenly evaporated without leaving a trace, together with the already established "clicks"...

Well, as Julius Caesar already stated in his book Commentarii de Bello Gallico : "Horum omnium fortissimi sunt Belgae", or "from all of them, the Belgae are the most valiant"...

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