Why don't oil refineries work harder to produce more gasoline?

The United States has nearly 150 refineries owned by 54 companies operating in 33 states. These facilities have produced nearly 350 million gallons of gasoline a day so far this year in order to meet consumer demand. But there are limits to how much gasoline these refineries can produce, based on the type of crude oil the refinery is using and its processing equipment. In general, gasoline makes up about 45 percent of the total output.

To some extent, refineries can shift the mix of products they make to emphasize the production of gasoline over other fuels, such as diesel or heating oil. In the fall, after gasoline demand has peaked, refiners increase production of heating oil in preparation for winter demand. In the spring, the emphasis shifts to building inventories of gasoline for the upcoming driving season.

The larger, long-term problem is that the United States refining capacity to manufacture gasoline is not keeping pace with demand. Until recently, low profit margins on gasoline – along with major environmental restraints and Not-In-My-Backyard sentiments – have discouraged construction of new refineries.

No new grassroots refinery has been constructed in the U.S. since 1976. All additional capacity has been the result of expanding or improving the efficiencies of existing facilities. However, as the economics of refining have improved over the last two years, companies have announced plans to significantly boost their U.S. refining capacity. For example, ConocoPhillips recently announced plans to expand capacity and increase capabilities at nine of its 12 U.S. refineries, which will boost the company’s capacity to make fuels such as gasoline, diesel and heating oil by 15 percent – the equivalent output of a new world-scale refinery.

Primarily because United States refining capacity hasn't grown as rapidly as gasoline demand, the shortfall has been made up with increased gasoline imports from Caribbean, Canadian and European refineries. Imported gasoline now accounts for about one out of every 10 gallons of gasoline sold in the United States. In the last 10 years, gasoline imports have risen by more than 60 percent.

Shouldn't the government regulate oil profits?

History serves as a helpful teacher on this question. As part of a general effort to combat high inflation in the early 1970s, President Nixon placed price controls on the oil industry and many other sectors of the American economy. Eventually the controls were lifted from other industries, but they remained in place for U.S.-produced oil as the government tried to partially protect consumers from the jump in world oil prices caused by the oil embargo of 1973-74. A so-called windfall profits tax was imposed on the industry in 1980, when again world oil prices rose dramatically as a result of supply disruptions stemming from conflicts in Iran and Iraq. The government began phasing out the tax in 1981.

Although various price and profit control programs did limit income to oil companies, it's questionable whether they benefited consumers in the long run. Between 1974 and 1980, imported oil prices averaged about 50 percent more than the price for oil produced in America. As a consequence, U.S. oil companies were discouraged from exploring for and finding supplies of oil and natural gas at home. Meanwhile, industrial and individual consumers were shielded from higher prices that might have encouraged greater energy conservation.

A report by the U.S. Energy Information Administration (EIA) that surveyed the events in the 25 years following the 1973-74 oil embargo concluded that federal price controls and allocations systems not only "failed to resolve these problems (electricity brownouts and rapidly rising prices), they seemed to aggravate them."

According to a 1990 Report of the Congressional Research Service, the windfall profits tax that was signed into law in 1980 and repealed in 1988 drained $79 billion in industry revenues during the 1980s that could have been used to invest in new oil production – leading to 1.6 billion fewer barrels of oil being produced in the U.S. from 1980-1988. The tax reduced domestic oil production as much as 6 percent, and increased oil imports as much as 16 percent.

Why don't oil refineries work harder to produce more gasoline?

The United States has nearly 150 refineries owned by 54 companies operating in 33 states. These facilities have produced nearly 350 million gallons of gasoline a day so far this year in order to meet consumer demand. But there are limits to how much gasoline these refineries can produce, based on the type of crude oil the refinery is using and its processing equipment. In general, gasoline makes up about 45 percent of the total output.

To some extent, refineries can shift the mix of products they make to emphasize the production of gasoline over other fuels, such as diesel or heating oil. In the fall, after gasoline demand has peaked, refiners increase production of heating oil in preparation for winter demand. In the spring, the emphasis shifts to building inventories of gasoline for the upcoming driving season.

The larger, long-term problem is that the United States refining capacity to manufacture gasoline is not keeping pace with demand. Until recently, low profit margins on gasoline – along with major environmental restraints and Not-In-My-Backyard sentiments – have discouraged construction of new refineries.

No new grassroots refinery has been constructed in the U.S. since 1976. All additional capacity has been the result of expanding or improving the efficiencies of existing facilities. However, as the economics of refining have improved over the last two years, companies have announced plans to significantly boost their U.S. refining capacity. For example, ConocoPhillips recently announced plans to expand capacity and increase capabilities at nine of its 12 U.S. refineries, which will boost the company’s capacity to make fuels such as gasoline, diesel and heating oil by 15 percent – the equivalent output of a new world-scale refinery.

Primarily because United States refining capacity hasn't grown as rapidly as gasoline demand, the shortfall has been made up with increased gasoline imports from Caribbean, Canadian and European refineries. Imported gasoline now accounts for about one out of every 10 gallons of gasoline sold in the United States. In the last 10 years, gasoline imports have risen by more than 60 percent.