Answer Desk’s do-it-yourself oil price forecast

I have read there is plenty of oil on the market but the real problem with gas prices is refining capacity. This has been supported by recent news reports. Why do we not see investment in refining capacity given the high price of gasoline?
— W.F., Columbia, S.C.

We do see investment, but not in brand new refineries. One reason is that it’s very hard to get the permits and approvals to build a new gasoline refinery close enough to the people who need the gasoline.

Some of that investment, though, doesn’t produce more gasoline — it produces cleaner gasoline. Refiners recently completed a round of hundreds of millions of dollars of investment to upgrade their equipment to produce low-sulfur diesel in order to meet new, tougher clean air rules.

Refiners do, however, constantly upgrade their plants to squeeze a few more gallons out of each facility. To do that — putting in a new unit to squeeze more capacity or installing bigger pumps to move that product through the system — they’ve got to shut the plant down. That means a temporary drop in production — usually in late winter/early spring when the heating oil season is winding down and the driving season hasn’t year heated up. This year, those planned shutdowns dampened production even though demand remained fairly strong.

So while there are no new refineries, the capacity of the existing ones has been steadily rising. At the start of 1983, U.S. refineries churned out 6.2 million barrels of gasoline a day. By the beginning this year, production reached 9.2 million barrels.

Unfortunately, that still hasn’t been enough to keep up with demand. At the end of March, American drivers burned through about 9.5 million barrels of gasoline a day — or more than 400,000 barrels more than this time last year, according to the latest Energy Department data.
When demand is stronger than supply, prices go up. Last week, pump prices were up 9.7 cents to 270.7 cents per gallon, according to the Energy Dept. — the ninth consecutive increases. Prices are now 11.9 cents per gallon higher than at this time last year.

And that’s a national average: on the Gulf Coast, where about half of U.S. refining capacity is based, pump prices were up 12.3 cents to 256.5 cents a gallon; on the West Coast prices rose 8.0 cents to hit 309.6 cents a gallon. In California, which requires a special blend that not all refineries can produce, prices were up 7.6 cents to 322.8 cents per gallon. That’s 48.5 cents per gallon above last year's price.

Usually, higher U.S. gasoline prices bring in more imported gasoline as foreign producers try to cash in on the rise in pump prices. Imports have been rising in the past few weeks.

Meanwhile, higher oil prices do have a big impact on gasoline prices. Crude oil — the raw material used to make gasoline — accounts for about half the price of each gallon that comes out of he refinery. So new refineries wouldn't help much there.

MORE FROM ANSWER DESK View the archive Check out answers to earlier reader questions. Or click on a topic below for more specific questions and answers: Accounting 101 Credit and debt Economic explanations Energy enigmas Home sweet home Miscellaneous mysteries On the job Saving and investing Small business Taxes

MORE FROM ANSWER DESK

Answer Desk Section Front

Who needs overpaid bankers? Who gets extended jobless benefits Easing job losses point to wobbly recovery Long-term jobless face frayed safety net GDP growth overstates case Recession over? Readers don't believe it Breaking down the cost of health care Commercial real estate bust looms 'Official' job numbers don't tell the whole story Getting mortgage help Answer Desk Section Front   Add Answer Desk headlines to your news reader: