Any of us lulled into a false sense of security about diesel prices when they started to drop at the tail end of last year were in for a rude awakening with the latest price spikes.
For me, it brought back the lessons I learned last year while participating in the cross-country speaking tour Let’s Talk About Volatile Fuel Prices, conducted in partnership with Markel Insurance. I know many believe that the latest price spikes are just the latest example of greedy oil companies looking for every excuse to squeeze every dime they can out of the businesses reliant on their product. After all, how could a fire at a refinery in Nanticoke, Ont. and a relatively short-lived rail strike cause diesel to be in such short supply that it justified a 20% spike in prices in some areas?
The reality, as Michael Ervin, one of the country’s most respected experts on the oil industry, patiently explained to me and others during last year’s tour, is that North American refineries are operating at close to full capacity. Even a small glitch, such as a fire at a refinery in Nanticoke, is enough to temporarily create a shortage of supply in an area and such volatility sends prices skyrocketing.
It’s important to understand just how significant has been the decline in the number of fuel refineries in North America. In the United States, for example, there were roughly 300 refineries 20 years ago; now there are about 150. In Canada there were about 40 refineries 20 years ago; now we’re down to 17.
Refinery closures were a response to declining demand for fuel during the 70s. Fuel demand has been on the rise the last 15 years as a result of overall economic growth but new refineries are not being built. Why? Possibly because the oil executives miscalculated in their predictions about the strength of the economy and the impact on the demand for fuel. The more cynical believe capacity is deliberately kept low as a way to keep prices high. But we also have to keep in mind the increased impact of the NIMBY (not-in-my-backyard) syndrome over the past 20 years. Nobody wants to see a refinery built in their backyard. Also, building a new refinery – say a three or four thousand barrel a day operation – requires an investment of $3-$4-billion. That kind of investment has to pay for itself over the next 25 years and the new focus on alternative energy sources is making that kind of investment increasingly risky.
This is not to say that no investments have been made in improving refinery capacities. The refineries in existence today are more efficient than they were 20 years ago. But a lot of the investment the last five years has gone into complying with new regulatory standards such as taking lead, benzene and sulfur out of fuel. These government mandates – as necessary to our health and the sustainability of our environment as they have been – did divert away billions from improving capacity.
The bottom line: As long as refinery capacity remains tight, the only certainty about future diesel pricing is continued uncertainty.