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The New York Times: Oil Industry Says Biofuel Push May Keep Gas Prices Up

New York Times photograph

(A tanker leaving a refinery in Chalmette, La. Oil companies have scaled back plans to increase fuel production at existing refineries because of calls for greater use of ethanol.)

Published: May 24, 2007

Gas prices are spiking again — to an average of $3.22 a gallon, and close to $4 a gallon in many areas. 

And some oil executives are now warning that the current shortages of fuel could become a long-term problem, leading to stubbornly higher prices at the pump.

They point to a surprising culprit: uncertainty created by the government’s push to increase the supply of biofuels like ethanol in coming years.

In his State of the Union address in January, President Bush called for a sharp increase in the use of biofuels, along with some improvement in automobile fuel efficiency to reduce America’s use of gasoline by 20 percent within 10 years. Congress is considering legislation calling for a nearly fivefold increase in the use of ethanol.

That has forced many oil companies to reconsider or scale back their plans for constructing new refinery capacity.

In hearings before Congress last year, oil executives outlined plans to increase fuel production by expanding existing refineries. Those plans would add capacity of 1.6 million to 1.8 million barrels a day over the next five years, for an increase of 10 percent, according to the National Petrochemical and Refiners Association.

But those plans have since been scaled back to more than one million barrels a day, according to the Energy Information Administration, an arm of the federal government.

“If the national policy of the country is to push for dramatic increases in the biofuels industry, this is a disincentive for those making investment decisions on expanding capacity in oil products and refining,” said John D. Hofmeister, the president of the Shell Oil Company. “Industrywide, this will have an impact.”

The concerns were echoed in a recent report by Barclays Capital, which said the uncertainty about the ethanol growth “will do little to accelerate desperately needed investment in complex United States refining units.”

“Indeed, it is likely to deter and further delay investment, if not rule out many refinery investments completely.”

Even so, the current cost of gas — which in real terms is approaching the old peak of $1.42 a gallon in March 1981, or $3.31 adjusted for inflation — has renewed suspicions that the oil industry is looking for ways to keep profits high by delaying much-needed investments. Senator Charles E. Schumer, Democrat of New York, began hearings yesterday on the topic “Is Market Concentration in the U.S. Petroleum Industry Harming Consumers?”

And the House voted yesterday by a narrow margin to penalize any oil companies, traders or retailers found to be charging “unconscionably excessive” prices for gasoline and other fuels. President Bush will probably veto the measure because the White House has said such legislation would amount to price controls.

Experts point to many short-term reasons the United States is running low on gasoline, causing prices to rise: many oil companies are doing maintenance work on refineries; new federal rules make fuels cleaner but costlier; and a string of delays, fires and accidents in the industry have reduced supplies just when drivers are starting to hit the road for summer vacations. Many analysts predict prices will keep rising, then soften later in the summer as demand trails off.

Energy executives dismissed any suggestions that they were intentionally keeping gasoline off the market.

The oil companies say their views on the longer-term prospects for fuel reflect simple economics. Because of the enormous investments required to expand refineries, they say they have no other choice but to re-examine their plans in light of the calls for more ethanol fuel, regardless of how realistic they may be.

“The policy environment has shifted dramatically,” said Mike Wirth, head of global refining business for Chevron. “There is a great risk that has been introduced to projects, predicated upon increasing supplies, that the demand may not be there.”

Refineries are a choke point in the nation’s supply of fuel. Because they have not invested enough in refineries to increase gasoline supplies, oil companies have been unable to meet the country’s growing demand in recent years. That has forced them to rely on imports, which are more expensive than fuel refined domestically.

The fragility of the refining system became apparent after Hurricanes Katrina and Rita in 2005. At the time, President Bush offered to reopen some military bases as sites for constructing refineries and Congress passed legislation to encourage refiners.

But oil companies rejected the idea of constructing new refineries in the United States, saying it would be impractical and too expensive.

As a result of the push for biofuels, and encouraged by federal subsidies and grants, dozens of ethanol distilleries are being planned. These investments should double the annual production of ethanol from corn to 15 billion gallons by 2012 from about 6 billion gallons today.

But given farmland constraints and the need to use corn for food, that is as much ethanol as can possibly be produced from corn, according to the ethanol industry’s own calculations. Ethanol producers recognize that it is not clear how an additional 20 billion gallons of ethanol — President Bush has called for 35 billion gallons of biofuels by 2017 — would be produced from cellulose or biomass.

“The current thinking is that based on today’s technology, we suspect corn-based ethanol will generate at least 15 billion gallons,” said Brian Jennings, the executive vice president of the American Coalition for Ethanol, an association of ethanol and corn producers. “Beyond that, it’s uncertain. The marketplace will make that determination on where it will come from.”

Yet some members of Congress would like to make the president’s goal for biofuels a mandatory target — the equivalent of 2.3 million barrels a day that would, in effect, create an ethanol industry roughly the size of world-class oil producers like Kuwait or Nigeria.

The economics of cellulosic ethanol, made from nonfood crops and agricultural waste, are also unclear. Since cellulosic ethanol, still at an experimental stage, is twice as expensive as corn-based ethanol, there are currently no commercial-scale cellulosic plants.

Lawrence Goldstein, an energy analyst at the Energy Policy Research Foundation, an industry-financed group, has been warning for nearly a year that the government’s twin goals of encouraging refiners to increase production and promoting increased supplies of biofuels work against each other.

“These two policies are not complementary,” Mr. Goldstein said. “These policies are in conflict.”

In addition, Mr. Goldstein said, an emphasis on ethanol might lead to increased volatility in fuel prices.

“If we get a bad corn crop, we will end up paying for it at the pump and on the food shelves,” he said. “We are not buying security. We are increasing volatility.”

Clay Sell, the deputy secretary of energy, acknowledged the concern, but said that rising energy consumption meant both biofuels and additional refining capacity would be needed in the long term.

“One can think that these goals are potentially in conflict,” Mr. Sell said. “But demand growth supports the need for investments in biofuels and growth in refining capacity. Are we concerned about it? Yes. But do we believe these concerns are well founded? No.”

Until the mid-1990s, the United States had significant spare refining capacity. But because of consolidation in the industry, the number of refineries declined while unprofitable operations were shut. As demand grew, however, and capacity remained flat, the picture changed. In recent years, refineries in the United States have been running at or close to full capacity.

Domestic refineries can now process about 17.5 million barrels of crude oil each day, much of it imported. But with consumption now close to about 21 million barrels a day, more imports of refined products are also needed.

In recent weeks, refiners point out that they have been increasing output: gasoline production in the United States is at its highest level ever, 8.85 million barrels a day.

Also, by increasing output from existing refineries, oil companies say they have expanded their production by 200,000 barrels a day since last year. Expansion of existing plants has added the equivalent of 10 new refineries over the last 10 years.

The refining industry has also spent vast amounts — more than $50 billion in the last 10 years — to meet requirements to produce cleaner fuels, according to the American Petroleum Institute, the industry’s main trade group.

But demand is outstripping supply. In the first three quarters of the year, gasoline use grew by 2 percent, nearly twice last year’s pace. Domestically produced supplies, though, have increased by only 0.5 percent a year on average.

Some consumers, meanwhile, are trying to drive less or are simply absorbing the higher cost. “I’m already driving the minimum,” said Dennis Zygnowicz, 51, of Garden City, Mich., who recently stopped at a Shell station and paid about $12 to put less than four gallons in his GMC Jimmy. “The only way I could do any less would be to ride a bike.”

Another driver, Tamar Bittelman, a kindergarten teacher from Berkeley, Calif., says her daily commute gives her little choice. “It’s unbelievable to me how much I’m paying for gas,” said Ms. Bittelman, who recently paid $3.56 a gallon to fill her 1998 Subaru Legacy wagon. “I’m just much more aware of how much every trip to the grocery store is costing us.”

Lisa Alcalay Klug and Nick Bunkley contributed reporting. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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