Offshore drilling is no price panacea
August 26, 2008
Open the California coast and the offshore waters of Florida and the Carolinas to new oil drilling and prices at the pump will drop, contends Republican presidential candidate John McCain. And Democratic rival Barack Obama soon after eases his opposition to offshore drilling, with the same hope.
All this despite warnings from the federal Energy Information Agency that even wide open offshore drilling wouldn’t influence gas prices for at least 10 years.
Meanwhile, the reality of oil refining on the West Coast over the last 20 years makes it plain that producing new oil off California will probably never impact pump prices significantly. That’s because of one simple question: Where would they turn the oil into gasoline?
The bottom line here is that there is no refinery capacity in or near this state to make new oil into gasoline. That is no accident, either. It is a deliberate policy of big oil companies like Chevron, Shell and ConocoPhillips.
Some of the most compelling evidence that oil companies know limited refining capacity leads to high gas prices and big profits came in an internal Texaco Inc. memo written in 1996 and exposed in 2005 by a California consumer group called the Foundation for Taxpayer and Consumer Rights, since renamed simply Consumer Watchdog.
The memo, never denied by officials of the old Texaco, since absorbed by Chevron Corp., declared that “the most critical factor facing the refining industry on the West Coast is surplus refining capacity. Supply significantly exceeds demand year-round. This results in very poor refining margins and very poor refinery financial results.”
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A similar internal Chevron memo of approximately the same vintage warned that “if the U.S. petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refinery margins.”
Well, no new refining capacity has been added in California since then. None is now proposed. California refineries consistently operated at 90 percent of capacity or above for the last few years, which actually translates to full use because of down time for maintenance.
And what do you know? There’s no more whining from oil companies about low refinery financial margins. Rather, each quarter seems to produce new profit records.
Meanwhile, more than 1 million gallons of gasoline per day are imported into California. Which means that if and when offshore oil from California enters the gasoline marketplace, it will not come through California refineries unless today’s supplies from Alaska are shipped elsewhere. Rather, new oil will be refined in Japan, Singapore, Australia or Indonesia and brought back here at great shipping cost.
Why not elsewhere in America? Because refineries in other parts of this country also operate very close to capacity, as not one new refinery has been build in the United States since 1976.
How likely is any new oil to lower prices when it has to undergo a 12,000-mile round trip before reaching the gas pumps?
What’s more, today’s imports would be even higher if Shell Oil had gotten its way early in this decade. For much of the early 2000s, Shell tried hard to close its Bakersfield refinery, but various state officials led by then-Attorney General Bill Lockyer resisted. Shell consistently claimed the refinery could never again operate profitably.
Most likely, the company’s real motive was outlined in those once-secret Texaco and Chevron memos. Cutting refinery capacity raises prices and profits. We see this when gasoline prices spike every time a refinery fire or accident reduces output even for a few days.
But Shell did not get its way. Rather than closing the Bakersfield facility, the Dutch-British oil giant eventually sold the plant to Utah-based Flying J Inc., which until then was best known for operating truck stops.
Flying J has reaped profits from that refinery ever since, while its gas stations generally price their fuel below average levels. The company presently plans to double its capacity at Bakersfield. So much for Shell’s assertion that the facility couldn’t make money.
Add to all this the fact that any newly authorized offshore oil exploration could not produce fuel for at least seven years, maybe 10, plus the fact that oil exploration ships are currently fully booked for years to come, and you arrive at the conclusion that the McCain offshore oil talk is nothing more than expediency designed to take advantage of consumer alarm over high gas prices. And Obama’s willingness to go along contradicts his campaign theme of bringing major change to American political and economic life.
The bottom line is that new offshore oil drilling would likely not help anyone much, except politicians. Not oil companies, who didn’t actively press for it until after McCain raised the subject. They’d rather let things go along as they are, since they can’t process any more oil in this country, anyway. Not consumers, who won’t see prices drop much soon unless they continue reducing consumption.
So why even think about doing it?