By Conn Carroll Senior Editorial Writer
Gas prices may have peaked nationally at $3.87 a gallon on April 9 but that is still more than double the price Americans were paying when President Obama
was sworn into office. With such high prices youd think oil refiners would be making record profits.
But youd be wrong.
Thanks to federal government mandates oil refiners are losing millions of dollars every quarter. As a result two refineries in the Philadelphia area have already been shut down and a third is scheduled to close this August. Thousands of jobs have been lost and if all three facilities go offline the East Coast will have lost 50 percent of its refining capacity.
How is this possible?
First forget everything youve ever heard about oil being a perfectly fungible commodity where prices are set globally. That may have been true five years ago but in 2010 the price for West Texas Intermediate (WTI) oil began falling as major oil fields in Canada and North Dakota came online. Meanwhile the Arab Spring has kept the price of Brent crude oil high. It is now common for the price of a barrel of WTI to be $20 cheaper than a barrel of Brent.
Again if oil was truly fungible this would not hurt East Coast refineries any more or less than refineries in Texas. But not all oil is created equal. The WTI oil from Canada and North Dakota is harder to refine than the Brent crude oil that Philadelphia refineries had been getting off boats from West Africa and the North Sea.
It would have cost each East Coast refinery hundreds of millions of dollars to upgrade their facilities. And it might have been a good business decision to bite the bullet and do it but for government ethanol mandates -- specifically the 2007 Energy Independence and Security Act which requires that every gallon of gas must contain 10 percent ethanol by 2022 (it was 2 percent in 2005). Ethanol mandates require refineries to sell their finished gasoline to blending terminals that then combine it with ethanol brought from the Midwest by train (ethanol cannot be transported by pipeline). The blending terminals then distribute the finished product to gas stations.
Every gallon of government-mandated ethanol cuts demand for refined gasoline by one gallon. Less demand for refined oil means lower prices for refiners and lower prices mean more East Coast refiners go out of business.
And dont get excited about those lower prices either because you dont share any of the savings at the pump. Measured by its per-gallon energy content the ethanol mixed with your gas costs more than the gas itself. Ethanol helps you fill your tank for less but it costs you more because it makes you fill your tank more often.
Thomas OMalley chairman of PBF Energy recently testified to Congress If the fuel substitutions from 2012 to 2022 ... are maintained we will lose over that time period an additional 10 percent minimum of U.S. capacity. ... If bio/renewable fuels manufacturers can produce on a superior economic basis to hydrocarbon fuels they should do so and take market share the old fashioned way -- better quality and better price without government mandates or subsidies.
So what will the East Coast do after losing half its refining capacity or more? Retailers will have to develop longer and more complicated supply chains to keep their stations stocked. According to the federal Energy Information Administration this will result in higher prices and higher price volatility at the pump.
Higher prices. More volatility. Fewer jobs. Youd think the Obama administration would be looking to repeal these ethanol mandates.
Youd be wrong.
Obama is looking to make them worse. Last month Obamas Environmental Protection Agency moved closer to upping the ethanol mandate from 10 to 15 percent. Obamas environmentalist allies would no doubt view the resulting refinery closings as a victory for Gaia but for anyone who owns a car on the East Coast it would be a huge loss.
Conn Carroll is a senior editorial writer for The Washington Examiner. He can be reached at
ccarroll@washingtonexaminer.com.
