Jolted by Gas Prices? Don’t Be Too Quick to Cuss the Refiners

Despite record profits and high gasoline prices, Shell Oil Co. plans to close its Bakersfield refinery in October. It produces 2% of California’s gasoline and 6% of its diesel fuel, which means an already tight fuel market is about to get even tighter. Drivers throughout the state are blaming Shell, but the real villain is the state’s burdensome regulations and punitive taxes.

With refineries running at 96% of capacity nationwide, simple scheduled maintenance at a plant can produce a price hike at the pump. And yet no new refineries have been built in this country since 1976; no new California refineries have been built in 35 years. On the contrary, since 1981 the number of refineries nationally has shrunk from more than 300 to half that many. The single biggest reason for the decrease in refineries is that extreme environmental regulations make it almost impossible for oil companies to build new facilities. Do you want one in your neighborhood? No one else does either. Never mind that you smell more gasoline at a filling station than at your typical refinery, thanks to improvements in technology and equipment.

Oil companies also want to limit their exposure and liability in overzealous lawsuits and attacks from the Environmental Protection Agency. In 1994, an independent contractor accidentally damaged a pipeline, leaking large amounts of oil into the Skagway River in Alaska. Edward Hanousek, a manager for the project, was off duty and nowhere near the accident at the time. Nevertheless, he was charged with two federal crimes and sentenced to six months in prison. The threat of lawsuits drives refineries, which are at higher risk, out of business.

When the government isn’t prosecuting employees, it is creating laws to make gas more expensive. Regulations requiring reformulated gasoline are making many older refineries obsolete, and California has special regulations that are different from the rest of the country. As Congress passes pork projects that benefit individual members’ home districts -- like federal ethanol mandates that put corn-based products in our gas (great for Midwest farmers, terrible for drivers) -- it makes producing gasoline more complicated and thus more expensive.

And then there are the taxes. We often forget about gas taxes at the pump because we see just the per-gallon price. In California, the per-gallon price includes more than 50 cents in federal, state and local taxes (all states collect 18.4 cents per gallon in federal taxes) -- a full 8 cents higher than the national average, according to the American Petroleum Institute. Let’s stop padding the state coffers.

Without the taxes, paying $1.50 for a gallon of gas would seem like a steal considering that the oil is shipped by tanker from the Middle East or another faraway place, refined and then trucked to the pump. A gallon of Evian water costs $6, well more than a gallon of gasoline.

There also is the matter of Shell’s ultimate goal -- to make money. Last I checked, there’s nothing wrong with that. Shell is making the same decision that many other companies have made -- to scale back California operations and move to states that welcome their business. California has more regulations, higher taxes, higher workers’ compensation costs and higher labor costs than almost anywhere else in the country. Until that changes, we will continue to see other firms do the same.

I lived the first 30 years of my life in Bakersfield. When you drive down Coffee Road, you can still see the abandoned Tosco refinery. When it closed, my cousin lost his job there. You can see the signs of change and evolution in the oil industry in which I also worked. Life moves on, and so will businesses in this overly regulated climate.

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David Nott is president of the Reason Foundation and a registered professional petroleum engineer in California. He worked for Shell from 1986 to 1994.