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Regional Gas Price Spikes Pose New Challenges for Industry, Lawmakers

Memorial Day weekend marks the unofficial start to the summer driving season — and in recent years that has meant steadily rising gas prices. But for the second consecutive year, drivers filling their tanks for holiday road trips paid less at the pump on average than a year earlier.

And AAA motor club, which pegged the average retail price for a gallon of gasoline nationally at $3.63 on May 27, projects that prices will continue to drop this summer.

Despite this bright picture nationally,not everybody has been enjoying cheap gasoline. Across much of the upper Midwest and the Pacific Coast, price spiked to more than $4 a gallon just before Memorial Day. Ironically, some of the hardest-hit areas — such as North Dakota, Minnesota and Nebraska — are near the sources of booming North American oil production, such as the Bakken shale formations and the Western Canadian tar sands.

The regional price spikes pose new challenges for industry and policymakers. In past summers, the primary driver of higher gas prices has been supply shortages and the high cost of crude oil on world markets. But crude oil prices are down from a year earlier, and the Energy Information Administration projects they will fall further in the year ahead.

Private sector and government analysts say the regional spikes in gasoline prices can be blamed on a high number of planned and unplanned refinery outages, which affect areas served by the facilities. Earlier this year, malfunctions or breakdowns caused unplanned refinery shutdowns on top of scheduled closures for routine maintenance, all of which led to regional gasoline shortages and price increases.

The situation prompted Senate Energy and Natural Resources Chairman Ron Wyden, D-Ore., and committee member Al Franken, D-Minn., to ask Energy Secretary Ernest J. Moniz to restart a data collection program authorized by Congress to track planned refinery outages.

A 2007 energy law (PL 110-140) required the department’s statistical arm — the Energy Information Administration — to review and analyze information on scheduled outages at least twice a year.

The intent of the reporting requirement was to preclude simultaneous shutdowns of multiple refineries in the same region, Wyden and Franken wrote. But the EIA stopped issuing the reports in 2011, citing funding cuts.

Under the law, the Energy secretary can encourage refiners to limit the capacity taken out of service at any one time should the EIA’s studies show that the outages could affect gas prices regionally or nationally. The department lacks authority, however, to forbid refiners from conducting scheduled maintenance or to compel facilities to keep operating.

The EIA reports didn’t persuade refiners to harmonize their outages. In fact, they don’t coordinate their schedules for legal and business reasons — many treat that information as proprietary, according to American Fuel and Petrochemical Manufacturers, a trade association for refiners. The group said it is unaware of any situations where the Energy Department suggested that a refinery change its outage schedule.

“However, market forces — such as the limited availability of skilled labor and engineering firms — actually serve to spread out planned refinery turnarounds while refiners take steps to ensure their customers are adequately supplied during periods of shutdown,” the industry group said in a statement.

The fuel and petrochemical manufacturers group noted that scheduled outages generally require two to six months of planning for up to two weeks of work. “Turnarounds,” or total shutdowns for inspections and repairs that require removing crude oil from the equipment, happen every three to five years, require one to two years of planning and last anywhere from 20 to 60 days, according to the group.

“Due to the complexity of these operations, there is little to no flexibility on timing or schedule,” the organization said.

Wyden is examining whether there are ways to improve the EIA reporting requirement, said committee spokesman Keith Chu. For example, the law directed the EIA to collect outage data from commercial reporting services rather than directly from refiners, he said.

Should refineries voluntarily disclose scheduled outages, they run the risk of appearing to collude with other facilities that could plan concurrent shutdowns to provoke market reactions, said Patrick DeHaan, senior petroleum analyst at But if the government had some authority over when refineries could go offline, that concern wouldn’t exist, he said.

“Given the situation, it may be time that the government looks at some sort of regulatory body in regard to the nation’s refineries,” DeHaan said.

A mix of regulatory and market forces has reshaped the U.S. refinery landscape, DeHaan said, leading to domination by fewer, but bigger, refineries. The cost of complying with tougher environmental regulations forced some smaller refiners to close, he said, and facilities well-positioned geographically have expanded to take advantage of higher profits.

Routine maintenance isn’t the only reason that some refineries haven’t been producing as much gasoline. Some Midwestern facilities have launched large-scale equipment upgrades so they can process larger quantities of cheap Canadian heavy crude, much more of which may be transported through the United States via the Keystone XL oil pipeline (should the Obama administration approve its construction).

BP began a multibillion-dollar modernization of its Whiting, Ind., refinery in 2008 to expand its heavy-crude processing capability. Ultimately, the overhaul will allow the facility to refine up to about 85 percent heavy crude, an increase from 20 percent before the project began; it is expected to be completed this year.

Extensive renovations can greatly limit the volume of gasoline a facility can produce in the meantime, though. According to the EIA, the Indiana refinery, which BP says is the sixth largest in the country, has kept 260,000 barrels per day offline since November while a new petroleum coker is installed.

“Longer-term projects already underway magnified the impact of the planned and unplanned outages,” the EIA said in a petroleum report on May 23.

Regardless of the reasons, refineries will always need to shut down periodically, especially because many of them are decades old. DeHaan likens them to cars — they need regular upkeep, but every so often they break down anyway.

And Midwest gas prices have declined steadily since the pre-holiday surge. DeHaan attributed the reversal to refineries in other regions that began sending supplies to region “to take advantage of very, very healthy margins.”

“It’s because the free market worked that prices are now coming back down in the region,” DeHaan said.

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