Gasoline Supply: The Role of Imports

Gasoline Supply: The Role of Imports
September 14, 2004
Lawrence C. Kumins
Specialist in Energy Policy
Resources, Science, and Industry Division

Gasoline Supply: The Role of Imports
Gasoline demand in the United States has grown consistently during the past
decade, increasing by a total of 20%. Between 1999 and 2003, gasoline consumption
grew by 500,000 barrels per day, accounting for all of the increase in petroleum
consumption during that period. While 2004 may see growth slow down because of
high prices, during the first seven months of the year gasoline demand was up by
another 1.9%.
The fact that gasoline supply has not kept up with demand has been reflected in
pump prices that have risen from $1.50 at the start of 2004 to as high as $2.06 per
gallon in late May. When supply and demand become out of sync with their previous
relationship, prices change to establish a new balance. The outcome has been a period
of volatile gasoline prices, which have set record highs that have become a focal
point for consumers and policy makers, and raised concerns about their impact on the
Gasoline is supplied both by U.S. and foreign refiners. Domestic producers’
capacity is limited. As a result, nearly 1 million barrels per day of gasoline and its
components are imported. Imported blending components — especially those used
in ethanol-blended fuel — are increasingly important to total U.S. supply. Without
this supplemental supply, gasoline would be less available and prices likely higher.
Imports most recently have come from Canada and the U.S. Virgin Islands,
which supply one-third of the off-shore supply. Argentina, the Netherlands, Russia,
the United Kingdom, and Venezuela provide another third. Imports peaked in March
2004, took a dip, and reached new highs in July. Increased imports may have
contributed to pump prices backing off their May highs in late summer.
New gasoline blending components from Venezuela and the rehabilitation of a
refinery in Aruba may also contribute to enhanced gasoline component supply later
this year. Gasoline component availability — which has increased during 2004 —
gives domestic refiners an added measure of flexibility in using their capacity, and
contributes to enhanced supplies of fuels needed to meet demand for ethanol-based
gasoline and other specialized regional blends.
Potential policy concerns raised by growing reliance on gasoline imports include
the availability of foreign supplies that meet U.S. specifications, whether incremental
foreign supplies can be provided quickly enough to meet shifting demand, and the
delivered price of imported gasoline.
Two legislative efforts were debated in the House regarding gasoline supply
issues during 2004. One, H.R. 4517, has passed the House but not been taken up in
the Senate. It would provide for easier permitting for refinery capacity expansion.
And H.R. 4545, which did not pass the House, would have limited the growth of
special regional fuel blends, often called “boutique fuels.”
This report will be updated as events warrant.

In troduction ......................................................1
Gasoline Demand..................................................1
Gasoline Supply...................................................2
Boutique Fuel Supply Issues.....................................6
Where Do Gasoline Imports Come From?..............................7
Imported Gasoline — Is the Nation Overly Dependent?....................9
Policy and Legislation.............................................11
List of Figures
Figure 1. U.S. Gasoline Demand: 1993 - 2003...........................2
Figure 2. U.S. Gasoline Production & Demand: Jan. 2003 - July 2004........3
Figure 3. Make-up of U.S. Gasoline Imports: Jan. 2002 - July 2004..........5
Figure 4. U.S. Gasoline Inventory: Jan. 2002 - Aug. 2004..................7
Figure 5. Average Daily Gasoline Imports by Country of Origin
Jan. 2000 - Apr. 2004...........................................8

Gasoline Supply: The Role of Imports
Average U.S. gasoline prices have risen sharply during 2004, beginning the year
at $1.50 per gallon and peaking at $2.06 in late May. They subsequently declined to
$1.87 in August as inventories increased.
Among the factors causing 2004’s gasoline price volatility has been a shortage
of domestic refining capacity, which has affected gasoline supply availability,
creating a need for substantial imports. U.S. gasoline imports — in the form of
conventional gasoline, reformulated gasoline, and gasoline components — currently
make up slightly more than 10% of the nation’s supply.
Potential policy concerns raised by growing reliance on gasoline imports include
the availability of foreign supplies that meet U.S. specifications, the speed at which
incremental foreign supplies can be provided to meet shifting domestic demand, and
the delivered price of imported supplies.
The nation’s stressed gasoline supply capacity has attracted recent legislative
In the House, the Gasoline Price Reduction Act (H.R. 4545) was brought to the
floor under suspension of the rules (passage requires a two-thirds vote) on June 15,
but failed by 236-194. The bill was intended to increase gasoline availability by
limiting the number of fuel blends required to meet clean air standards and by
allowing waivers of fuel blend requirements during supply disruptions. This would
have made it easier to ship gasoline between markets when needed to balance supply.
On June 16, the House passed the United States Refinery Revitalization Act
(H.R. 4517) by a vote of 239-192. This bill would provide incentives to increase
refinery capacity, focusing on areas with closed refineries or those experiencing
layoffs or high unemployment. It would also charge the Department of Energy (DOE)
with centralizing the process of obtaining environmental permits for new refinery
projects, including additions and upgrades.
Gasoline Demand
Gasoline demand in the United States continues to grow. Although gasoline
comprises about 45% of total U.S. petroleum consumption, its incremental growth
during the recent past accounts for virtually all of the increase in total oil demand.

Figure 1 shows the trend in U.S. gasoline consumption during the past decade,
during which demand rose 20%. Growth has persisted in more recent years, although
2004 may see some late-year slowdown because of higher prices. Between 1999 and

2003, petroleum consumption increased by half a million barrels per day (mbd),

rising from 19.5 mbd in 1999 to 20.0 mbd in 2003. During the same time span,
gasoline consumption rose by the same amount as demand grew from 8.4 mbd to 8.9
Figure 1. U.S. Gasoline Demand: 1993 - 2003
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Gasoline Supplied
Source: Energy Information Administration, Monthly Energy Review, June 2004, Table 3.4.
Gasoline use has continued to grow during the first half of 2004, as almost 9.0
mbd of gasoline was supplied to consumers, an increase of about 1.9% over the
previous year’s first half. While there is some preliminary evidence that high pump
prices may have begun to retard growth in gasoline demand, it is still too soon to
evaluate whether this trend has shifted, and how overall petroleum demand might
track for all of 2004.
Gasoline Supply
Gasoline is manufactured in U.S. refineries and imported from foreign refiners1
as well. Figure 2 shows data for total U.S. demand and domestic production. The
gap between the two sets of figures is filled by imported product made by foreign

1 U.S. production is represented by gasoline production data (which includes foreign
blending components) from Table 2 of the Weekly Petroleum Status Report, adjusted to
reflect the inclusion of imported blending components, as shown in Table 9.

refiners. Imported supply consists of finished gasoline — which meets U.S.
specifications and is market-ready — as well as blending components.
The latter have become an increasingly important part of gasoline supply, since
an increasing amount of ethanol-blended gasoline is being consumed in this country.
The trend toward ethanol blends may continue because it is the oxygenate used to
replace the additive methyl tertiary butyl ether (MTBE), which has been banned in
New York, California, and Connecticut, and is being phased out in other places.
Figure 2. U.S. Gasoline Production & Demand: Jan. 2003 - July 2004
Jan 03FebMarAprMayJunJulAugSepOctNovDecJan 04FebMarAprMayJunJul
Gasoline Supplied
Gasoline Refined
Source: EIA, Weekly Petroleum Status Report, June 30, 2004, Table 10.
In one form or another, the nation imports slightly more than 10% of the
gasoline it consumes, the unavoidable outcome of growing motor fuel demand and
refining capacity which has not kept pace. This supply is necessary to fill the gap
between gasoline production and demand shown in Figure 2.
Figure 3 shows the imports of gasoline in detail, the total of which is rising in
the time-frame in this figure. Total imports peaked this summer at about 1.1 mbd; for
the first seven months of 2004, they averaged 900,000 barrels per day.
Imports fit into three general categories:
!Conventional gasoline, which comprises about half of the gasoline
sold in the nation and conforms to the least stringent environmental
standards currently in effect. The U.S. environmental standards for

this fuel include a prohibition on the use of lead, limits on
summertime volatility, and limits on manganese and sulfur content.
!Reformulated Gasoline (RFG) is used in major metropolitan areas
in 17 states and the District of Columbia which have significant
ozone problems. In April 2004, EPA designated areas in a total of 32
states and the District as nonattainment areas for a new ozone
standard to be phased-in between 2007 and 2021 2. RFG has several
requirements, including the mandate that it contain sufficient
oxygenates to meet a minimum oxygen requirement of 2% by
weight. The oxygenate often added is either the chemical MTBE
(now banned in several states) or ethanol. RFG’s peak usage is
during summer months, when it comprises about 29% of national
!Gasoline components are imported with increasing frequency,
amounting to 50% of imports during 2004. Gasoline is a “cocktail”
of hydrocarbons blended at refineries and fuel terminals.
Increasingly, cocktail ingredients are available from foreign refiners,
and they are being imported to expand U.S. refinery output. Since
finished gasoline is a blended product, refiners can supplement short
capacity by buying foreign components and blending them here in
such a way that U.S. specifications are met.
As a result of the Clean Air Act requirements and state mandates, many
different types of gasoline are sold in the United States. In addition to conventional
and RFG, there is oxygenated fuel (higher oxygen content than RFG), low volatility
conventional gasoline, and a variety of state and local blends. These “boutique fuels”
include ethanol blends, California Cleaner-Burning Gasoline (also used in Nevada
and Arizona) and a number of other local formulations.
As noted above, the trend toward ethanol blends may continue because it is the
oxygenate used to replace the additive MTBE. Ethanol blends cannot be stored or
transported by pipeline, because ethanol and gasoline do not mix well and can
separate. The blend must be mixed near the point of final consumption.
Imported components of the gasoline “cocktail” fit into the increasingly
common practice of local blending for local markets, in that “cocktail” components
often come from multiple sources and are assembled at terminals and other gasoline
distribution points. For refiners, blending gasoline from component parts represents
a small incremental supply bonus, since they can purchase opportunistically those
components that might be available on world markets, and manufacture the
remainder in their own facilities. In total, U.S. refiners do not have the capacity to
make all the gasoline sold in this country, but they often do have substantial
flexibility — within overall capacity constraints — to make hard-to-import

2 For a full discussion of the new ozone standards, see CRS Report RL32345,
Implementation of EPA’s 8-Hour Ozone Standard, by James E. McCarthy.

components tailored to U.S. specifications which foreign refiners cannot easily
The trend shown in Figure 2 suggests that U.S. refiners are able to produce
during an average month a bit more than 8.0 mbd, while demand is trending just
under 9.0 mbd this year. The actual numbers fluctuate from month to month. Figure
3 shows total gasoline imports averaging about 900,000 barrels per day.3 Imports of
finished gasoline and components — which have averaged, respectively, about

500,000 barrels per day and 400,000 barrels per day during the past 12 months —

bridge the gap between U.S. refinery production and demand. Without this
supplement, there would be a supply shortfall.
Figure 3. Make-up of U.S. Gasoline Imports: Jan. 2002 - July 2004
1 200
1 000
Jan '02AprJulOctJan '03AprJulOctJan '04AprJul
Source: EIA, Weekly Petroleum Status Report, August 2, 2004, Table 9.
The increasing use of blending components in building up the gasoline pool is
seen in the rise of components as a proportion of nationwide gasoline inventories.
Figure 4 shows that total gasoline stocks started 2003 at essentially the same level
(212 million barrels) that they were at the end of August 2004 (206 million barrels).
But blending components held in inventory rose from 54 million barrels, or 26% of
inventory, to 72 million barrels, or 35% of total inventory. This is a substantial
increase, and shows refiners’ demand for stocks of components to meet the need for
locally-mixed ethanol blends as well as diverse boutique fuels.

3 Energy Information Administration, Weekly Petroleum Status Report, Table 9.

Boutique Fuel Supply Issues
Fifteen states have chosen to address clean air issues by calling for localized
gasoline formulations for all or part of their states4. Many of these requirements are
in effect during summer months when concerns about ozone are greatest.
The diversity of fuel formulations has raised concerns among stakeholders
regarding refiners’ ability to provide the diversity of products required in sufficient
quantities as well as the product transport sector’s ability to distribute the diverse
product slate. In its Staff White Paper on Boutique Fuels,5 the Environmental
Protection Agency (EPA) contends that the refining and distribution system works
well under normal operating conditions. But the agency notes that when the entire
fuel market is stressed, the places where supply shortfalls and volatile prices tend to
show up first and be most acute involve geographically isolated fuel programs.
Many state boutique programs are of this nature, and have fewer suppliers and
fewer transport options. In situations where there is a transportation failure, a supply
shortfall of gasoline components, or some combination of these and possibly other
factors, prices can become very volatile as small supply glitches impact an isolated
local market disproportionately. There appear to have been few such instances, but
some have taken place.
The experience in the Chicago metro area during the spring of 2000 is one
example of how a confluence of circumstances can play out. As the Chicago
metropolitan area transitioned to ethanol-blended gasoline in the late spring of 2000,
a key pipeline supplying gasoline from the Gulf Coast refining area failed. The
supply shortfall from traditional refiners — coupled with the initial difficulty in
making reformulated gasoline blendstock for oxygenate blending in local refineries
— combined to create a tight regional supply situation, which saw pump prices
nearly double in May and June.6 But by July, supply from other sources and
restoration of pipeline flow began to return prices to accustomed levels. The price
spike, while only a few months in duration, was substantial, and is often pointed to
as a “worst case” situation of how a convergence of mishaps can lead to a substantial
disruption in a market delineated by boutique fuel requirements.
EPA notes that problems of this type to date have been limited in terms of
geographical scope and duration. It appears that the fuel supply system can support
the current structure of fuel standards, absent some set of untoward circumstances.

4 A full discussion of boutique fuels, see CRS Report RL31361, “Boutique Fuels” and
Reformulated Gasoline: Harmonization of Fuel Standards.
5 Environmental Protection Agency, Study of Unique Gasoline Fuel Blends (“Boutique
Fuels”), Effects on Fuel Supply and Distribution and Potential Improvements, October

2001. See pages 2 to 4.

6 See Midwest Gasoline Prices: A Review of Recent Market Developments, CRS Report
RL30592, June 2000. Also see Final Report of the Federal Trade Commission, Midwest
Gasoline Price Investigation, March 29, 2001.

Most stakeholders, EPA contends,7 are instead concerned with the proliferation of
boutique fuels into the future and would like to see limits on new boutique fuel
Figure 4. U.S. Gasoline Inventory: Jan. 2002 - Aug. 2004
25 0
20 0
15 0
10 0
Jan - 20 02 Apr Ju l Oct Jan - 20 03 Apr Ju l Oct Jan - 20 04 Apr Ju l
Source: EIA, Weekly Petroleum Status Report, August 25, 2004, Table 3.
Where Do Gasoline Imports Come From?
Currently, one-third of gasoline imports comes from Canada and the U.S.
Virgin Islands. Another third comes from Argentina, the Netherlands, Russia, the
United Kingdom, and Venezuela; the remainder is imported in smaller quantities
from a diversity of nations.
Figure 5 illustrates trends in overall gasoline imports, as well as various
suppliers’ shares of the imported gasoline market. It also shows how the amounts
supplied by each important supplier can vary from month to month, as well as
changes in the overall supply of imports.
Canada — source of much of the nation’s hydrocarbon imports — is the single
leading supplier of gasoline on a regular basis. Canada’s exports have increased
steadily during recent years. And the U.S. Virgin Islands — location of the very large
Hovenessa refinery, jointly owned by Amerada Hess and the Venezuelan national oil
company Petroleos de Venezuela (PDVSA) — is also a consistent source of supply.

7 EPA, op cit. p 4.

But imports from the other major suppliers fluctuate monthly. Even Venezuela
has experienced difficulties in meeting its historic refinery output levels since an oil
workers strike in late 2002. Venezuelan gasoline exports to the United States have
dropped to about 40% of levels seen prior to 2002’s political disruption. Recent
efforts to regain U.S. market position by PDVSA (discussed below) could produce
a supply benefit, although refinery operations are still recovering from the strike.
Figure 5. Average Daily Gasoline Imports by Country of Origin
Jan. 2000 - Apr. 2004
120 0
100 0 U. K.
U.S. Virgin IslandsNetherlands
Ru ss i a
Ve ne z u e l a
Ca n a d a
200 Ar ge n t i n a
Ot h e r
J a n- 00 Ma y Sep J a n- 01 Ma y Sep J a n- 02 May Sep Jan- 03 May Sep Jan- 04
RussiaU.S. Virgin IslandsNetherlands
VenezuelaUnited KingdomCanada
Ar g e nt i n a Ot her
Source: EIA, June 2004.
In addition to Canada and the Virgin Islands, increased gasoline imports now
come from the United Kingdom and the Netherlands, where refinery utilization is
much lower than in the United States; many other nations with spare refinery capacity
are suppliers as well.
A recent enhancement to the supply of imported gasoline has been made by
PDVSA, which has started shipping the complete cocktail for ethanol blended
gasoline (without the ethanol, which is blended near the point of sale). PDVSA has
planned to export 1 million barrels per month of this high-priced component, called89
RBOB, starting with test cargoes in June. Platts Oilgram Price Report noted that

720,000 barrels were exported in July, and the extra barrels in the U.S. market have

8 This is an acronym for “reformulated before oxygenate blending.”
9 “European Gasoline Sellers Lose U.S. Market Share to Cheaper Venezuelan Exports,”
Platts Oilgram Price Report, July 26, 2004. p. 1.

provided extra competition for comparable cargoes from Europe, where distances and
shipping costs are greater. This illustrates the significance of the supply of foreign
gasoline components, and how they can impact U.S. gasoline prices.
It is likely that high U.S. prices for gasoline and its significant components will
continue to attract foreign refiners’ attention, perhaps leading them to seek permanent
market share. PDVSA — which also owns U.S. refiner CITGO, affording direct
retail market access — announced that for September it planned to export 12 RBOB
cargoes to the United States, including four or five for the New York-Connecticut
ethanol-only blended markets.10
Another example of what may be taking place in off-shore refined product
supply is the revitalization of a large refinery in Aruba that was recently acquired by
Valero Energy, an independent refining company with most of its facilities in the
United States.
While geographically well-positioned to serve U.S. markets, this facility had an
unsuccessful operating history. Valero began improving operations quickly and is
adding upgrading units so that gasoline components can be made in increasing
quantities from low-quality crudes. The capacity of this refinery is 275,000 barrels
per day, a figure which suggests that it could — when it reaches capacity —
contribute significantly to Gulf and East Coast gasoline supplies. Imports from Aruba
are so recent that they are not reflected in DOE data (which lag by a few months) on
product imports by country.
Imported Gasoline — Is the Nation Overly
Dependence on imports to meet over 10% of national gasoline needs has begun
to cause concern that these imports might contribute to 2004’s high prices. While
supplies from Canada may have similar physical characteristics and prices to the
output from U.S. refiners — and offer speedy delivery — products from refineries
farther afield may not. Factors such as the cost and timeliness of incremental supply,
physical reliability, and meeting U.S. product specifications can affect price and
supply at the gas pump.
Shipping cost may be an additional issue. Gasoline and many other refined
products need to be protected from contamination from other oils. As a result, they
must be shipped in clean vessels. These product carriers are usually much smaller
than crude carriers, and — not benefitting from economies of large scale — have
higher unit costs. In addition, the clean tanker market is influenced by spot charter
rates for vessels, making product shipping costs often higher and more volatile than

10 E-mail from Fadi Kabboul, Minister Counselor for Energy Affairs, Embassy of
Venezuela. Aug. 20, 2004.

crude oil. It is cheaper to ship crude to a local refinery than to transport products an
equivalent distance.11
Imported products cost more than those refined domestically simply by virtue
of transport costs. The higher import costs impact the last units of gasoline supply,
providing a price umbrella for domestic refiners, whose pricing — like all industrial
pricing — is linked to the cost of the last increments of the good involved. As long
as gasoline is imported to meet a sizeable imbalance between domestic supply and
demand, this situation offers a likelihood of prices which are above the cost of
domestic manufacture. This assumes that new domestic refining capacity to replace
imports could produce U.S.-spec gasoline at costs below those of foreign refiners
plus product transport tariffs to the United States.
In addition to price-related considerations, the speed of supply response to price
signals from U.S. gasoline markets seems less than it might be from a refiner located
here. It may well be that distance mutes price signals related to an increase in
demand, for example, and refiners abroad may be slow to receive the message that
U.S. consumers desire more gasoline and are currently paying prices which would
justify a foreign refiner’s manufacturing of U.S. specification fuel. Even if the foreign
refiners’ response to U.S. prices were instantaneous, it could take as long as a month
— in some cases more — for the physical supply to arrive here.
Manufacturing fuel for the U.S. market may be another source of delayed
response to U.S. market signals. Some of the substances called for in satisfying U.S.
fuel needs may not be produced in the ordinary course of refinery runs abroad. And
some — like RBOB — are difficult for many refiners to make, calling for a longer
set-up time.
Lags in getting foreign supply may have contributed to 2004’s price increases.
Figure 3 shows low imports during late 2003 and early 2004, which corresponded
to a decline in gasoline inventories and consistent price increases seen throughout the
first half of 2004.

11 The Energy Information Administration (EIA) described the economics of
attracting imported gasoline to the United States in its Summer 2001 Motor Gasoline
Outlook, showing how the incremental cost of transport must be surmounted. It notes
that “...Western Europe is an important source of incremental or swing gasoline
supply in the United States. Trans-Atlantic gasoline price differentials provide some
indication of the attractiveness of the U.S. market to European refiners. When U.S.
prices exceed European prices adequately to cover transportation costs ...,” the
United States will attract supply from refineries located there. EIA notes that Europe-
U.S. gasoline transport costs vary greatly, while averaging 4 cents per gallon as
imputed by wholesale price differentials. But the data shown on the graph
accompanying the discussion indicate differentials as high as 14 cents per gallon, and
year-long periods averaging 8 to10 cents per gallon. These figures embody the costs
of shipping presumably imported crude to a refinery in Europe, so they embody crude
transport costs. According to EIA figures, crude transport to the U.S. from the
Persian Gulf averaged $2.37 per barrel (5.6 cents per gallon) during 2003.

Is dependence on gasoline imports for more than 10% of the nation’s gasoline
supply undesirable? In theory, importing gasoline may have few drawbacks. It might
make little difference if this fuel were to be supplied from across the border in
Canada. The products supplied might be U.S.-specification conventional gasoline or
RFG. What about imports from a refinery operated by a major international oil
company in Europe or nearby in the Caribbean? At what point does foreign refined
product dependence become a policy concern? There is no clear answer, but major
considerations in evaluating this question include:
!Availability of supplies meeting U.S. specifications, so that demand
can be met without the need for waivers that could compromise
environmental protections.
!The speed with which incremental supply might be available, given
just-in-time gasoline inventories, in order to avoid excessive price
!The delivered price of foreign supplies, and whether they are above
the incremental price of domestic output, such that they ultimately
contribute to higher prices.
Policy and Legislation
The nation has no apparent defined policy on refined oil product imports, nor
is there a policy regarding gasoline prices. There is a general perception among
policymakers that price volatility is undesirable, but there is no consensus on what
the price level ought to be. Nor is there consensus about how the government might
deal with market volatility. Similarly, there appears to be general agreement that spot
shortages — run-outs and lines at gas stations — are to be avoided. But there are no
guides for policy actions to remedy such situations should they take place, and it
could be that letting market forces make corrections without government
involvement would be the better course of action.
Some policy initiatives in the 108th Congress are embodied in two House bills
focusing on the proliferation of regional gasoline blends and expanding refinery
capacity. H.R. 4545, the Gasoline Price Reduction Act, centered on the proliferation
of special, local boutique gasoline blends. The bill failed to get the required two-
thirds House vote for passage under suspension of the rules. It would have authorized
EPA during significant supply disruptions to issue waivers of state provisions
requiring boutique fuels. The boutique fuel requirement is seen as potentially limiting
supply by impeding the movement of fuel between areas; a shortage in one spot
might not be met with extra fuel from a nearby area because of differing
requirements. The bill also proposed capping the number of boutique fuels at the
current level.
H.R. 4545 proposed dealing with supply fungibility; but it did not offer
remedies that could have increased the supply of domestically produced gasoline.
H.R. 4517, the Refinery Revitalization Act — which passed the House, but has not

seen Senate action — is aimed at facilitating increases in capacity by fast-tracking the
environmental review and permitting of facilities in a designated Refinery
Revitalization Zone. The Secretary of Energy would designate the zones, coordinate
environmental reviews, and make final decisions on federal authorizations for new
refineries within the zones. To the extent that those wishing to construct a new
refinery — or expand an existing facility — have been hindered by environmental
regulation, this measure is intended to offer some assistance.
These bills articulate at least some components of a gasoline supply policy,
dealing with domestic supply and indirectly with imports, and with fuel
specifications that impact the distribution of supply. Both measures have drawn
substantial criticism, however, particularly on environmental grounds. For example,
with regard to the refining bill, opponents express concern that such a measure would
override state clean air programs. Among its cons, H.R. 4545 raises concerns about
the overall cost of gasoline, given that many state programs which avoid full-fledged
RFG have been implemented to keep down gasoline costs.
The refining proposals attempt to address the 1 mbd gasoline production
shortfall, which is made up by imports in one form or another. Encouraging growth
in domestic refinery capacity implies a judgment that it is advantageous to have that
capacity in the United States, in contrast to offshore, even if offshore is relatively
nearby. As noted above, domestic production could reduce transportation costs and
provide quicker supply response to unanticipated changes in demand. This could
shorten the duration of a potentially disruptive price spike resulting from a gasoline
supply shortfall.
Refinery proposals under current debate do not address other issues impacting
refinery projects, such as an historic lack of profitability in this industry segment12.
It may well be that the current refining situation — with imports holding a “price
umbrella” over domestic gasoline production — may be a profitable situation for
many refiners, many of whom are realizing record earnings in the first and second
quarters of 2004. While this year’s earnings may be high, one year’s experience does
not outweigh years of low profits. While a basic change in refiner profitability might
be suggested, it is too soon for many firms to consider making significant
investments in long-lived capital equipment, whose cost is recouped over many
Were the prospects for long-term profitability in the refining industry to improve
by virtue of a sustainable recovery in refining margins, it is likely that additional
investment in added capacity would be seen. But it might take several years of high
margins before firm managers and their bankers would become confident enough to
make substantial capital commitments.

12 For a more extensive discussion of refinery profitability, see CRS Report RL32248:
Petroleum Refining: Economic Performance and Challenges for the Future, March

1, 2004.