Venezuela could solve U.S. refinery problem

The Miami Herald
Posted on Tue, Apr. 13, 2004
BY FADI KABBOUL
fkabboul@embavenez-us.org


With the price of gasoline in the United States reaching an all-time high, most new articles and media pundits point to the worldwide price of crude oil as the sole culprit.

While it would make for a simpler world if that analysis told the entire story, it ignores a significant factor unrelated to crude oil prices -- namely, a shortage of U.S. refining capacity. This lack of adequate refining capacity is made worse by a maze of state and local environmental regulations that have required over-stretched refiners to produce more than 20 different gasoline formulations for various parts of the country, including states and counties that are literally next door to each other.

Venezuela is one of the major foreign suppliers of both crude oil and petroleum products, including gasoline, to the United States. Currently, Venezuela accounts for approximately 15 percent of all U.S. oil imports and is the second-largest foreign supplier of refined petroleum products. Venezuela is a vital player in the U.S. energy market, both as a foreign source of oil and through our national energy company's wholly-owned U.S. subsidiary, CITGO Petroleum Corp., which itself is the third largest refiner in the United States.

Because the United States is a natural outlet for our petroleum products, Venezuela has a commercial and historical commitment to serving this market. Consequently, we are concerned that U.S. policy-makers are not more aware of the need to increase Atlantic Basin refining capacity.

No new refineries have been built in the United States for over 25 years, and regulatory constraints make the construction of any new U.S. refineries unlikely. The loosening of some environmental rules by the Bush Administration may provide existing U.S. refineries with the opportunity to expand their facilities over the next 20 years, but it may be too little, too late.

It takes three to five years and a large investment to build a new refinery or expand existing capacity. Yet the United States has little room to maneuver in increasing its refining capacity, so that unforeseen events could result in potentially unsustainable strains on the U.S. refining system.

This is not mere speculation. Last August, the electricity grids supplying the Northeastern and Midwestern United States crashed unexpectedly, shutting down a number of refineries in those areas. The temporary shut down contributed to tight gasoline supplies, and to increases in gasoline prices of up to 36 cents per gallon. At that critical time, Venezuela increased its export of reformulated gasoline to help cope with the emergency.

Robert Slaughter, the head of the National Petrochemical and Refiners Association, said at the time, ''The supply and demand balance is so tight that if you lose major output even for a day, it does have some impact. Almost anything can have an impact on prices.'' Clearly, the decision to confront the task of overcoming the deficit in domestic U.S. refining capacity needs to be made now.

Venezuela's national energy company, Petroleos de Venezuela, S.A. (PDVSA), has one of the finest refinery systems in the world. Due to its geographic proximity to the United States, Venezuela's refineries are just four to five days of shipping time from the United States, compared to Middle Eastern refineries whose products take more than a month to arrive and a European refining system that is increasingly focused on meeting its own needs. Venezuela is already one of the largest petroleum-product suppliers to the United States in the world, but more can be done.

To this end, Venezuelan law facilitates U.S. investment in the construction of new Venezuelan refineries. Under the 2001 Hydrocarbons Law, foreign investors can own up to 100 percent of newly constructed refineries in Venezuela. Coupled with a reasonable tax structure, Venezuela's comparative advantages -- plentiful crude oil, an excellent physical infrastructure for such investments, and an educated and talented workforce -- make the country's appeal self-evident.

The refining problem facing the United States is real. It cannot be swept under the rug any longer. Although a ''made in the U.S.A.'' solution may not be possible, a ''made in the Western Hemisphere'' solution, or more particularly, a product labeled ''produced by the combined efforts of the United States and Venezuela,'' may well be the answer.

Fadi Kabboul is Minister Counselor for Energy Affairs in the Embassy of Venezuela in Washington.