Released on July 14, 2004
(Next Release on July 21, 2004)

A New Refinery?
Much has been made of the fact that no significant grassroots refinery has been built in the United States in nearly 3 decades other than some small simple refineries. Yet, U.S. refinery capacity has increased 1.9 million barrels per day over the last 10 years, which is equivalent to the addition of 1 medium-size refinery per year on average, as refiners attempt to de-bottleneck and make their refineries more efficient, change feedstocks, and add capacity to meet market opportunities. In EIA's latest Petroleum Supply Annual, Volume 1, although the number of refineries stayed the same between January 1, 2003 and January 1, 2004, capacity increased by 137,000 barrels per day, adding, again, the equivalent of another medium-sized refinery! The release of this information comes at a critical juncture within the petroleum refining industry, when many policy makers and industry analysts are debating the merits of adding distillation capacity by either building new refineries or by the reactivation of closed ones. High gasoline prices and questions about the ability of the U.S. refining industry to meet growing demand are fueling these arguments.

Concern regarding the adequacy of refining capacity is relatively recent. There was significant surplus capacity from the mid-1970s until the mid-1990s. The U.S. refining industry reached its peak in 1981 with 324 operable refineries with a total distillation capacity of 18.6 million barrels per calendar day. That same year, surplus refining capacity, measured as operable capacity minus gross inputs, totaled about 5.9 million barrels per day, resulting in an average utilization rate of 69 percent (see chart below). Many small, inefficient refineries shut down in the early 1980s when the Domestic Crude Oil Allocation Program was removed and their subsidies ended, but capacity was still in excess relative to demand. Many small refineries have continued to close, albeit at a slower rate than in the early 1980s, to reach 149 refineries today, with the last new grassroots refinery completed in 1976. Even with the shutdowns, however, total capacity has remained relatively flat since the mid-1980s as operating refineries have expanded at existing facilities.

Meanwhile, demand has grown, shrinking remaining excess capacity. In 1994, capacity was 15.0 million barrels per day, its lowest point since the peak in 1981, and utilization had risen to 92.6 percent. Since then, demand growth has been met by both increases in domestic refining capacity and product imports. With consumption of petroleum products, especially for transportation fuels including gasoline, diesel and jet fuel, expected to grow 1.5 to 2.0 percent per year on average in the years ahead, supply to meet that increase will continue to come from expansion in U.S. refining capacity and increased product imports, although both of these sources confront economical hurdles.

With many years of low returns on investment until recently, U.S. refiners are still faced with uncertainty over whether they will earn adequate returns on capacity expansion investments. Further inhibiting a rapid expansion in supply, tightening U.S. specifications relative to much of the rest of the world implies higher prices may be required to attract increasing import volumes - at least for the next few years. While both sources of supply (imports and capacity) will meet demand, it is not likely that we will see excess refining capacity such as that in the 1980s and early 1990s anytime in the near future.

Retail Gasoline Prices Gain 2.2 Cents
The U.S. average retail price for regular gasoline increased by 2.2 cents per gallon from the previous week to reach 191.7 cents per gallon as of July 12, 39.6 cents higher than this time last year. This is the first price increase in seven weeks. Retail regular gasoline prices were mixed last week, with the Midwest seeing the largest increase of 6.3 cents to hit 186.7 cents per gallon. Prices in California and on the West Coast remained the highest in the nation, with California prices falling by 1.1 cents to 219.3 cents per gallon and West Coast prices falling by 1.2 cents to 212.4 cents per gallon.

Retail diesel fuel prices gained 2.4 cents this week to a national average of 174.0 cents per gallon, which is 30.5 cents per gallon higher than a year ago. Retail diesel prices were up throughout the country last week, with the West Coast seeing an increase of 3.0 cents to hit 204.0 cents per gallon. California prices gained 3.7 cents to 211.3 cents per gallon.

Weekly Propane Build Continues Weak
The buildup of U.S. inventories of propane continued to be relatively weak with a 0.9-million- barrel weekly gain that positioned the nation's supply of propane at an estimated 44.5 million barrels as of July 9, 2004. Last week's modest gain in inventories partly reflects lower imports that were only about half the volume from the previous week. Imports are typically very strong this time of year with inventories showing some of the strongest gains during July, as primary stockholders build inventories in preparation for the next winter heating season. Accordingly, U.S. inventories of propane continued to edge further below the lower limit of the average range for this period. Regional inventories were surprisingly mixed last week with the combined Mountain/West Coast region up the most with a 0.4-million-barrel gain, followed by a 0.2-million-barrel increase in the Midwest. East Coast inventories continued slightly higher with a 0.1-million-barrel gain, while the Gulf Coast region remained unchanged. Propylene non-fuel use inventories also remained unchanged last week at 2.5 million barrels, a level accounting for a 5.6 percent share of total propane/propane inventories.

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