IntroductionIntroduction

Policymaker’s View of the Policymaker’s View of the Refining Industry Refining Industry

Increasing Domestic Refining Increasing Domestic Refining Capacity Capacity

The Mid-termsThe Mid-terms

Policymaker’s View of the Policymaker’s View of the Refining IndustryRefining Industry

Economics Economics

Historically Cyclical -But Is Historically Cyclical -But Is The Cycle BrokenThe Cycle Broken

Or Is the Industry Entering Or Is the Industry Entering a Golden Age?a Golden Age?

China's Oil Production and Consumption, 1986-2006*

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Year

Th

ou

san

d B

arre

ls P

er D

ay

Source: EIA International Petroleum

Consumption

Production

Net Imports

*2006 is Jan-Aug only

China’s GrowthChina’s Growth

China’s energy China’s energy consumption is projected consumption is projected

to 5 quadrillion Btu higher to 5 quadrillion Btu higher than the U.S. by 2030than the U.S. by 2030

Source: EIA, IEO 2006 OutlookSource: EIA, IEO 2006 Outlook

Policymaker’s View of the Policymaker’s View of the Refining IndustryRefining Industry

Economics Economics Market DistortionsMarket Distortions

IndustryIndustry

““From 1994 to 2003, the industry spent From 1994 to 2003, the industry spent $47.4 billion to bring refineries into $47.4 billion to bring refineries into compliance with environmental compliance with environmental regulations . . . by 2010 the U.S. regulations . . . by 2010 the U.S. refining industry will have invested refining industry will have invested upwards of $20 billion to comply with upwards of $20 billion to comply with new clean fuel regulations . .” new clean fuel regulations . .”

Red Cavaney, President & CEO – American Petroleum Institute, Testimony before Red Cavaney, President & CEO – American Petroleum Institute, Testimony before House Energy and Commerce, 09-07-05 Red Cavaney, President & CEO – American House Energy and Commerce, 09-07-05 Red Cavaney, President & CEO – American

Petroleum Institute, Testimony before House Energy and Commerce, 09-07-05.Petroleum Institute, Testimony before House Energy and Commerce, 09-07-05.

Regulators at EPARegulators at EPA

““Approximately 100 permits have been Approximately 100 permits have been issued to refineries since 2000 . . . issued to refineries since 2000 . . . Approximately 60 of the permit Approximately 60 of the permit applications in 2000-2003 involved applications in 2000-2003 involved projects to comply with Tier 2 gasoline projects to comply with Tier 2 gasoline requirements and may not necessarily requirements and may not necessarily involve increased production capacity.”involve increased production capacity.”

Brian Mannix, Associate Administrator, EPA. Testimony before Senate Brian Mannix, Associate Administrator, EPA. Testimony before Senate Environment and Public Works, A legislative hearing on S. 1772, “The Gas Environment and Public Works, A legislative hearing on S. 1772, “The Gas Price Act of 2005,” 10-18-05Price Act of 2005,” 10-18-05

Tight Refining Capacity = Tight Refining Capacity = Higher PricesHigher Prices

““We need more refining capacity. We need more refining capacity. One of the reasons why you’ve One of the reasons why you’ve got high prices is the demand is got high prices is the demand is greater than the supply. And greater than the supply. And when demand is greater than when demand is greater than supply, the price goes up.”supply, the price goes up.”

President discussing refining capacity in Biloxi, Mississippi, 04-President discussing refining capacity in Biloxi, Mississippi, 04-27-06. 27-06.

Tight Refining Capacity = Tight Refining Capacity = Higher PricesHigher Prices

““If we don’t get more refineries If we don’t get more refineries built then fuel prices could built then fuel prices could literally rocket to $US 100 to literally rocket to $US 100 to $US 200 (per barrel of oil) and $US 200 (per barrel of oil) and the world economy would come the world economy would come to a grinding halt.”to a grinding halt.”

Richard Branson, “Virgin’s Branson Wants Oil Refinery,” Richard Branson, “Virgin’s Branson Wants Oil Refinery,” MSNBC, 09-13-05MSNBC, 09-13-05

Refining Capacity and Refining Capacity and SecuritySecurity

““Besides feared shortfalls in Besides feared shortfalls in crude oil capacity, the status crude oil capacity, the status of world refining capacity has of world refining capacity has become worrisome as well.”become worrisome as well.”

Remarks by Chairman Alan Greenspan, Economic Club of New Remarks by Chairman Alan Greenspan, Economic Club of New York, 05-20-05York, 05-20-05

Refinery Capacity and Refinery Capacity and SecuritySecurity

““[T]he Refining system cannot shift quickly [T]he Refining system cannot shift quickly to meet unexpected needs. With Refinery to meet unexpected needs. With Refinery capacity running at high utilization levels capacity running at high utilization levels in many parts of the world, including the in many parts of the world, including the United States, product balancing is United States, product balancing is frequently done through international frequently done through international trade, which means products must travel trade, which means products must travel long distances . . .”long distances . . .”

Guy Carouso, Administrator – Energy Information and Administration, Guy Carouso, Administrator – Energy Information and Administration, Testimony before Senate Energy and Natural Resources, 09-06-05Testimony before Senate Energy and Natural Resources, 09-06-05. .

Global SecurityGlobal Security

ChinaChina VenezuelaVenezuela OPEC NationsOPEC Nations

Market Uncertainty Vs. Market Uncertainty Vs. Regulatory UncertaintyRegulatory Uncertainty

Market Uncertainty Limited Market Uncertainty Limited Government Role – Tax Policy Government Role – Tax Policy (EPAct 2005)(EPAct 2005)

Regulatory Uncertainty Regulatory Uncertainty

UncertaintyUncertainty

““Uncertainty over regulations can Uncertainty over regulations can delay investment decisions and delay investment decisions and permitting processes can add to permitting processes can add to investment lead times. Both of investment lead times. Both of these factors will slow the these factors will slow the industry’s response to bringing industry’s response to bringing additional supplies to the market.” additional supplies to the market.”

National Petroleum Council, “Observations of Petroleum Supply,” I-National Petroleum Council, “Observations of Petroleum Supply,” I-27, December 200427, December 2004

Boutique FuelsBoutique Fuels

Streamlining PermitsStreamlining Permits

““Streamlining should provide for Streamlining should provide for expeditious overall review and a expeditious overall review and a clearly defined process for clearly defined process for obtaining a permit, with agency obtaining a permit, with agency roles and responsibilities well-roles and responsibilities well-defined and specific deadlines for defined and specific deadlines for making permitting decisions.” making permitting decisions.”

National Petroleum Council, “Observations on Petroleum Supply,” I-27, National Petroleum Council, “Observations on Petroleum Supply,” I-27, December 2004.December 2004.

Streamlining PermitsStreamlining Permits

““NACS and SIGMA urge this committee NACS and SIGMA urge this committee and this Congress to build on and this Congress to build on progress made through EP Act 2005 progress made through EP Act 2005 in the following ways: - streamline in the following ways: - streamline permitting and siting procedures for permitting and siting procedures for expanding existing domestic refining expanding existing domestic refining capacity and for the construction of capacity and for the construction of new grassroots refineries . . .”new grassroots refineries . . .”

William Shipley III, Representing NACS, Testimony before Senate William Shipley III, Representing NACS, Testimony before Senate Energy and Natural Resources, 09-06-05. Energy and Natural Resources, 09-06-05.

The Senate’s AnswerThe Senate’s Answer

S.1772, The Gas Petroleum S.1772, The Gas Petroleum Refiner Improvement and Refiner Improvement and

Community Empowerment Community Empowerment Act or Gas PRICE ActAct or Gas PRICE Act

New Competition - New Competition - BiofuelsBiofuels

Vote Counting -Forty-five States offer Vote Counting -Forty-five States offer local policies supporting ethanol fuellocal policies supporting ethanol fuel

Conservatively limiting the scope to the Conservatively limiting the scope to the nine ethanol producing states in the nine ethanol producing states in the Corn Belt, ethanol supporters command Corn Belt, ethanol supporters command a decisive seventy- seven electoral votesa decisive seventy- seven electoral votes

In the 100 member U.S. Senate, there In the 100 member U.S. Senate, there are at least forty-three explicit fuel are at least forty-three explicit fuel ethanol advocates ethanol advocates

The Midterm ElectionsThe Midterm Elections

Status QuoStatus Quo Democrats control House Democrats control House Democrats control Senate Democrats control Senate

Status Quo - PolicyStatus Quo - Policy

Increased OCS productionIncreased OCS production Refinery permit streamliningRefinery permit streamlining Improved regulatory Improved regulatory

certaintycertainty Lower taxes Lower taxes

Democrats Control Democrats Control HouseHouse

Energy and Commerce Chairman Energy and Commerce Chairman Dingell – supported President Dingell – supported President Carter’s energy proposals including Carter’s energy proposals including windfall profits tax, voted nine times windfall profits tax, voted nine times for higher gas taxes, and voted for higher gas taxes, and voted against refinery expansion bills against refinery expansion bills

Democrats Control Democrats Control HouseHouse

Speaker Pelosi – Pelosi spokesman Speaker Pelosi – Pelosi spokesman Drew Hammill – “Expanding offshore Drew Hammill – “Expanding offshore drilling is something she has drilling is something she has historically opposed. It is not historically opposed. It is not included in any of the proposals on included in any of the proposals on energy the Democrats have put out energy the Democrats have put out there.” there.”

Pelosi voted to increase gas taxes at Pelosi voted to increase gas taxes at least five times.least five times.

Democrats Democrats Control SenateControl Senate

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Democrats Control Democrats Control SenateSenate

Environment and Public Works Environment and Public Works Chairman Boxer – Supports command Chairman Boxer – Supports command and control climate policy, increased and control climate policy, increased environmental taxes, voted for an environmental taxes, voted for an amendment that would give the EPA amendment that would give the EPA authority to site, construct , and operate authority to site, construct , and operate refineries.refineries.

Majority Leader Reid – 1 of only 19 Majority Leader Reid – 1 of only 19 Democrats to vote against the 2005 Democrats to vote against the 2005 Energy Bill, supported increasing Energy Bill, supported increasing gasoline taxes. gasoline taxes.

Democrats Control Democrats Control SenateSenate

Majority Whip Durbin – Sponsor of Majority Whip Durbin – Sponsor of windfall profits taxwindfall profits tax

Energy and Natural Resource Energy and Natural Resource Chairman Bingaman – Supports Chairman Bingaman – Supports mandatory climate policy , unlikely mandatory climate policy , unlikely OCS compromise. OCS compromise.

Thank You Thank You