I suggested a few weeks ago that rising crude oil prices along with seasonal demand and fuel requirements were the primary cause of this spring’s hike in U.S. gasoline prices. As Menzie noted yesterday, refining margins are clearly also now making an additional contribution. Which reminded me to look into the current status of the now decade-long effort of Arizona Clean Fuels to try to build a new refinery.
Shutdowns due to events such as a fire at BP’s Whiting, Indiana refinery and a boiler problem and steam outage at their refinery in Toledo, Ohio have led to significant reductions in gasoline inventories and increases in prices. But why don’t we have more spare capacity to cope with these kinds of problems?
Half the refineries that operated in the U.S. in 1976 have since been closed without a single new one built. Arizona Clean Fuels finally gave up in 2003 on their efforts to get all the permits for construction of a new one in Maricopa County, Arizona, and instead acquired property in nearby Yuma County for which they finally succeeded in obtaining the necessary permits from the Arizona Department of Environmental Quality and the U.S. Environmental Protection Agency. However, this month the plan ran into a new roadblock from a lawsuit filed by the Quechan Indian Tribe, whose reservation is apparently 40 miles away from the planned refinery. The Associated Press carried this story:
The Quechan Tribe has filed a lawsuit in U.S. District Court here that claims the federal government did an inadequate environmental review of artifacts and cultural resources before transferring the land.
The 3,500-member tribe wants to “prevent further destruction of Quechan cultural sites and resources” and force the federal government to follow environmental- and historic-preservation laws that govern such land transfers, according to tribal attorney Frank Jozwiak.
Once the tribe is satisfied that its historical and cultural interests are identified and appropriate steps are in place to protect and preserve those interests, Jozwiak said the tribe will not oppose the land transfer or the refinery.
The above AP story also reported that the District Court judge had ordered a temporary halt to construction. However, Arizona Clean Fuels officials tell me that this claim by AP was erroneous, repeating an error from an earlier story in the Yuma Sun without noting the correction that the Yuma Sun subsequently issued. The actual facts (according to the Yuma Sun) are as follows:
The defendants filed a voluntary standstill stipulation that stated that they would take no action on the property until a hearing was held….
With the recent court hearing, the defendants agreed to the temporary restraining order sought by the tribe, said Frank R. Jozwiak, the attorney representing the Quechans in the case.
All parties agreed to not transfer any more land and not conduct any ground-disturbing activity on any of the transfer lands, including land already transferred, until June 30, Jozwiak said, or until the court issues its decision on the tribe’s application for a preliminary injunction while this case is pending.
One can certainly understand the decision by the company to postpone further construction, as you realize the tremendous costs that would be involved when you begin a project of this size and then watch it all hang in limbo as one court case after another gets debated.
What if we’d had this refinery’s planned 85,000 barrels/day of gasoline online right now? That would represent a little less than 1% of total U.S. demand. In an environment like the present in which refining capacity may be the determining factor driving retail prices at the margin, with a short-run demand elasticity of 1/3, a 1% increase in quantity supplied would translate into a 3% reduction in price, or 9 cents per gallon using the current U.S. average retail price of $3.16 a gallon.
Admittedly, that calculation is a bit misleading, because it ignores the potential significant smoothing of price fluctuations that should come from adjustment of inventories and imports. But it does highlight the fact that, when those adjustments are working imperfectly (as they appear to be at the moment), even one more refinery could make a lot of difference.
Hope you’re enjoying those cultural artifacts.