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To: thackney

It costs about $2.5 Billion to build a 200,000 bbl per day refinery in the US. That refinery would process about 70 million barrels of oil per year. The interest cost to borrow the money to build the refinery would be about $175 million per year, or about $2.50 per barrel.

Average refinery margins for have been about $2.35 per barrel over a five year period.

In other words, the profit margin on refineries is not high enough to even pay the interest on a loan to build a new one, much less return a profit to the owner.

That's why we don't have any new refineries.

Environmental issues are the secondary concern. If there were money in it, the oil companies would work hard on getting the permits.

Instead, they have sold off their existing refineries to independents for about $0.25 on the dollar. The oil companies get to deduct the loss from their income taxes, the independents get to work with a ridiculously low capital cost.

There is about 12 million barrels of spare refining capacity in the world, mostly outside of the US. That spare capacity is equal to 3/4 of the total US refining capacity.

The US has been increasingly importing finished products from this spare capacity. However, environmental restrictions requiring doubled-walled tankers, among other things, have tightened the supply of tankers available for this service, which is why freight rates have soared recently.

The high freight rates have pushed up costs for refined products, including gasoline.

New tankers are being built, which will eventually reduce this problem, but because of the Exxon Valdez oil spill, major oil companies are not willing to own tankers. Third party shippers, who are less financially capable, are the one building the tankers. If the oil companies were not so worried about an oil spill, more tankers would be built sooner.

In the mean time, the high price you're paying for gasoline is the result.

Of course, supply and demand for crude oil, the value of the US dollar, and the world wide geopolitical situation, all contribute to the underlying cost of crude oil. That sets the base value of refined products.

But US refining capacity is not really a major factor. It is just one part of the distribution system that turns crude oil into refined products and delivers them, at the appropriate specifications, to the local markets.

"Balkanization" of US gasoline specifications (Lots of individual specifications for relatively small localities) is probably more important than the amount of US refining capacity. Balkanization makes the supply chain more tortuous, no matter where the refinery is located.


4 posted on 06/10/2004 8:29:04 AM PDT by LOC1
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To: farmfriend

ping


5 posted on 06/10/2004 8:46:18 AM PDT by Libertarianize the GOP (Ideas have consequences)
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To: LOC1
Environmental issues are the secondary concern.

I believe environmental issues are the primary concern. They push the economics to make it unprofitable.

6 posted on 06/10/2004 8:51:38 AM PDT by thackney (life is fragile, handle with prayer)
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To: Thud

Print the IBD article and reply #4 out for your significant other.


10 posted on 06/10/2004 9:31:50 AM PDT by Dark Wing
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