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Car at gas pump
8.29.03
Politics and Economy:
Pain at the Pump
More on This Story:
David Brancaccio on Gas Prices

DAVID BRANCACCIO: Not wanting the "legacy for my children" to be more of the greenhouse gases implicated in global warming, today I took the train to work instead of driving. That and the fact that I'm cheap and the price of gasoline has just gotten awfully expensive: $1.75 a gallon on average nationally...2.35 a gallon at one place I passed as I was leaving California last week. It is the biggest spike for gas prices around the country in recorded history.

I paraphrase here, but the oil industry's explanation for the sudden 12 cent a gallon surge was that you just can't get around that darn law of supply and demand. Americans use more and more gasoline and when the unexpected happens to disrupt supply — a gasoline pipeline breaks in Arizona or an electricity blackout halts six oil refineries — then, as night follows day, the prices will go up.

But this is Public Broadcasting and you expect us to go deeper than that. So let's delve.

The question becomes, why isn't there enough refined gasoline around to get us through the inevitable times when things go wrong?

One answer is that there aren't enough refineries.

PHILIP VERLEGER: In the case of the petroleum industry, I don't think there's been a new refinery built in the United States-- since the mid-70's.

DAVID BRANCACCIO: Philip Verleger runs an energy trend forecasting company based in California.

PHILIP VERLEGER: Gasoline demand goes up, companies do upgrade refineries and make new ones-- ask them to produce cleaner products. But it's-- but there's no real fundamental investment.

DAVID BRANCACCIO: He says there are lots of reasons...including federal antitrust officials telling big oil companies a few years ago that they couldn't merge unless they sold off some of their refineries, which they did. Verleger also says many of us would be upset if someone proposed building a new refinery around the corner. He says instead, what refineries have been doing is spending money to make new fangled gasoline to meet clean air rules.

PHILIP VERLEGER: We have not been able to resolve in our national debate-- the trade off between building new refining capacity, expanding refining capacity and providing the fuels to these vehicles that Americans want.

DAVID BRANCACCIO: That leads us to a new question: Why should refineries ensure plentiful supplies anyway? Since it's fair to say they do make more money when there's less gasoline. Why spend money to expand capacity if the result is lower gasoline prices? Verleger thinks that allegation is a little far-fetched.

PHILIP VERLEGER: They have the crude oil. They'd like to refine it. And they're really good at this. So-- I just-- you know, that's a story that does not seem to fly.

DAVID BRANCACCIO: Other analysts see it differently. Yesterday, the Rand think tank published a study based on wide discussions with refining industry officials. According to the study, those in the industry are patting themselves on the back for getting so efficient by ridding themselves of so much capacity. The study includes one executive's "happy" thought: "I think the industry has learned that it's okay to fall short on product. There is no reward being long on product or production capability."

In other words, there's no margin in being on the side of the little guy. If you're an investor in one of these refining companies, you may agree with that wholeheartedly. If you're driving somewhere this holiday weekend in a vehicle that requires fossil fuel, you may not. We can all agree on at least one thing, however. The biggest spike in gasoline prices on record is not just a household budget issue. It slows down the entire economy, costing by some estimates, as much as a billion dollars a week. Do the math. At that rate, it could cost us 52 billion dollars a year &%151; almost as much as we got back from the president's latest tax cut.

That's it for now. I'm David Brancaccio. Good night.

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