Oil and Gas Refinery: ‘Inconvenient Truths’
Column
By Charles T. Drevna   
Monday, 03 December 2007
smc Oil and Gas Refinery, Inconvenient Truth
To protect our economy, our standard of living and our place in the global marketplace, our legislators need to make sure they get it right – and get it right the first time, because we are going to be living with the results for a long time.
Our businesses are facing some critical choices right now regarding the country’s energy future. The choices we and our elected officials and others in government make on energy and climate policy over the next few years will affect this country’s economy, national security and status in the global marketplace for quite literally decades to come.

Whatever is accomplished in the way of energy and climate policy over the next several months and beyond must be done right. Many people are probably familiar with the adage “what’s once begun, is halfway done.” When it comes to policymaking, however, the adage frequently becomes “what has begun cannot be undone.” In the arenas of energy and climate policy, the stakes are simply too high, and the potential consequences too great for us and our government to do it wrong, because whatever we do, we will face its consequences for a long time. Mistakes, even with the best intentions, have the potential to bring the American economy to its knees.  

That’s why the debate of the day among Senate and House leaders has centered on whether or not there should or can be a conference. One thing the two bills do have in common, though, is that neither of them accomplishes much in the way of expanding domestic energy production and supply, improving the environment or reducing costs to the consumer – in fact, they would have the opposite effect. Punitive tax measures, expanding the biofuels mandate five-fold and price controls in the way of price-gouging legislation are but a few examples of what is currently being discussed.

Price Controls Necessary?
Against overwhelming evidence to the contrary, certain members of Congress have convinced themselves that oil and gas companies manipulate prices. The inconvenient truth about price gouging is this: It doesn’t exist. More than 24 federal and state investigations into price gouging over the past several decades have found no evidence of widespread wrongdoing or illegal activity on the part of the refining industry. More recently, a Federal Trade Commission report conducted in the wake of hurricanes Katrina and Rita found no evidence to suggest that refiners manipulated prices through any means, including running their refineries below full productive capacity to restrict supply, altering their refinery output to produce less gasoline, or diverting gasoline from markets in the United States.

In short, price-gouging legislation is a solution in search of a problem, another attempt at government price controls, which 30 years ago were disastrous for the American consumer.

The principles of a free market are unfortunately not always upheld in Washington, however. Such is the case with ethanol and biofuels. It’s an often-perpetrated misconception that the refining industry is anti-ethanol. This is not the case. Biofuels are, and will continue to be, an important part of the U.S. fuel portfolio. Ethanol is currently used in roughly half of all gasoline sold in the United States. In fact, ethanol production will easily exceed the 4.7 billion gallons of renewables mandated for 2007 by the Energy Policy Act of 2005, and the EPAct target of 7.5 billion gallons a year by 2012 will likely be surpassed as early as next year.  

A further expansion of the biofuels mandate is now the subject of congressional and administration consideration, and it is vitally important that they both consider all of the potential consequences and ramifications before legislating or implementing any further increase in biofuels mandates. At a time when they are being touted by some as the panacea to our energy and environmental problems, the inconvenient truth about ethanol and biofuels is that they are simply not all they were supposed to – and planned to – be. Yet we see proposals for a federally mandated increase in the production of renewables of up to 36 billion gallons a year – something that will prove to be technologically unattainable, economically harmful and potentially environmentally damaging.

And allow me to respond to our friends in the ethanol industry who recently issued a statement concerning worries about succumbing to the “nattering nabobs of negativity” and the impact on their product. Let me reply by stating that public policy programs that artificially prop parochial products through political pandering impede process and progress. Several recent studies point to potential environmental and economic problems of increased biofuels production.

We also know that the energy content of ethanol is about one-third less than that of gasoline, meaning that not only do motorists who drive on ethanol have to fill up their tanks more frequently, but per-gallon cost comparisons between ethanol and gasoline are inherently skewed. The higher the blend, the less efficient the fuel. The American Automobile Association (AAA) has begun issuing a “Btu-adjusted” price for E-85; recently, when E-85 was selling for $2.55 a gallon, AAA pegged the Btu-adjusted price at $3.35 a gallon. Another proposal that would do more harm than good is to exclude the oil and gas industry from the “Section 199 manufacturing deduction.” The deduction, included as part of the American Jobs Creation Act of 2004, provides needed tax relief for domestic manufacturers to help stimulate manufacturing activity in the United States.  

Petroleum refining and the production of domestic oil and natural gas resources were specifically included in the provision to incentivize the expansion of U.S. refining capacity and energy infrastructure. By law, the Section 199 deduction applies to a broad base of production activities, however, and does not specifically favor the oil and gas industry. The deduction promotes much-needed investment in domestic energy infrastructure, encouraging refining capacity expansion and domestic oil and gas production.

With demand for gasoline continuing to grow, U.S. refining capacity is already significantly strained despite multibillion-dollar reinvestments by the industry to expand it. Most refineries routinely operate at more than 90 percent capacity, which is significantly higher than the industrial average of 75 to 80 percent of capacity. The House-passed energy bill contains language that would make domestic oil and gas operations, including refining, ineligible for the Section 199 deduction. Making our businesses ineligible for the deduction places us at a competitive disadvantage with other manufacturers and industries.

We compete in a global marketplace. The United States already imports about 15 percent of its finished petroleum products – such as gasoline – from overseas. Section 199 helps American refineries compete with foreign entities, bolstering national energy security. Repealing Section 199 for the oil and gas sector would provide a disincentive for domestic investment and reinvestment. Doing so would increase the cost of production and drive energy production and petrochemical businesses overseas – increasing our reliance on foreign oil and gas, and thus threatening American energy security. Energy legislation should not be focused on creating winners and losers in the marketplace. Energy legislation should promote and expand a safe, clean, reliable and affordable supply of energy to keep our economy strong and moving in the right direction.

‘Right the First Time’
To protect our economy, our standard of living, and our place in the global marketplace, our legislators need to make sure they get it right – and get it right the first time, because we are going to be living with the results for a long time. And nowhere does this principle apply more than it does to climate change policy. Last week, the United Nations Intergovernmental Panel on Climate Change and Al Gore were awarded the 2007 Nobel Peace Prize. This shows that the issue of climate change has been elevated to the forefront of the political landscape, both in the United States and internationally.

The consequences of any climate change legislation, whatever shape or form it takes, will be far-reaching. In that light, there are a number of things Congress must bear in mind when considering climate legislation.

First, climate change is a global issue, and consequently requires a global approach. Without the engagement of the international community, any climate change policy will be ineffective. There are those who say that the United States should lead by example. In fact, the United States does lead by example, and has consistently done so for decades in the environmental arena. However, the simple truth when it comes to greenhouse gas emissions is that a ton of CO2 emitted in Dayton, Ohio, has the same effect as a ton of CO2 emitted in Shanghai or Mumbai or Moscow. Reducing CO2 emissions in the United States alone under any of the current legislative proposals, while emissions in developing countries like China and India are skyrocketing, will not accomplish anything to solve what is perceived to be a global problem; hence the term “global warming.” Instead, we will simply put the brakes on our economy, and transfer American jobs and wealth overseas while global CO2 concentrations, as well as traditional air pollution, continue to rise in regions with far less stringent environmental standards than what we have here in the United States.

Second, U.S. climate policy should not single out specific sectors or segments of the economy. Instead, a broad national approach should ideally be based on an energy efficiency initiative that affects everyone, which would expand the audience and the participants and not single out any specific or select group of industrial sectors. Under a cap-and-trade approach, allocations of emissions allowances must be fair. Here again, the government should not be in the business of choosing winners and losers. Each specific sector’s energy consumption should be taken into account when allocations are decided.

Third, any restriction on carbon emissions will likely lead to an increased demand for natural gas through fuel switching – particularly a cap-and-trade approach with stringent early reduction targets. American industry has already been hurt by the high prices brought about by a tight natural gas supply – particularly industries for which natural gas is an important feedstock.    

Further tightening of the natural gas supply will only serve to worsen the situation and send more American jobs overseas. For any U.S. climate change policy to be economically viable, the natural gas supply must be expanded.

Fourth, there is no question that any climate change policy enacted in the United States will come with a price tag. Cost analyses for various proposals, past and present, range upward into the hundreds of billions of dollars. To minimize the economic damage that will result from mandatory carbon restrictions, any climate change policy implemented must be simple, transparent, efficient and cost-effective. Additionally, any successful policy must ensure a stable, adequate supply of energy through proven low-carbon energy sources.

Our advice to members of Congress and the administration has been to “first, do no harm.” This will remain our mantra as we continue to engage in today’s and future policy debates, and work with policymakers to craft a sensible, realistic path forward for our nation’s energy future.

Charles T. Drevna is executive vice president of the National Petrochemical and Refiners Association. His opinions are edited from a statement he made in October at the Hart World Refining and Fuels Conference in Washington, D.C. For more information, visit www.npradc.org.
 
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