U.S. Refinery Expansion
•U.S. refining likely to continue to expand
•But U.S. may also need increases in product imports
•Still, short-term financial incentives for expansion look favorable
–Continued short-term market tightness
–Product specifications may increase product import prices
SAs we look ahead, 2004 may have encouraged more refiners to consider adding capacity.  It certainly should not have discouraged capacity investments.

SU.S. capacity has been expanding for the past decade, and is likely to continue to expand for 2 reasons.  First, improving margins in recent years have provided both capital and incentive for expansion; and second, the recent diversion of capital into the low sulfur fuels programs should be winding down, allowing companies to shift to expansion opportunities.

SThis is not to say expansion will keep up with demand growth.  Gasoline imports grew historically because they provided a more economic alternative than domestic supply.  The European gasoline surplus is expected to grow.  However, changing U.S. production specifications tend both to diminish the available volume of product imports and to increase the price required to attract the required quality of product.

SThus, incentives to expand capacity in the U.S. could increase as a result of an increasing price needed to attract imports.  In other words, U.S. capacity expansion decisions are influenced by world markets and associated world capacity changes.