Why no one's making more gas

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By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Motorists must get tired of hearing how refinery problems are causing high gasoline prices.

In a free-market economy, if there really was such a shortage (most experts say there is), and refining profits are so high (any oil company earnings report will attest they are), then why aren't people building more refineries?

The oil industry has long said refineries are too expensive, too hard to get a permit for, aren't necessarily needed when the government is calling for a reduction in gasoline use, and take so long to build that gasoline prices could collapse by the time one comes online. Instead, they are boosting output through expansions at existing refineries.

Consumers don't necessarily buy this, instead thinking the industry is in cahoots to restrict supply and reap massive profits.

But it's not like oil companies are the only ones who could build refineries. After all, the technology isn't particularly complex. And with everyone from investment banks to insurance companies to private equity firms, chasing high returns in an era of low global interest rates, there's a ton of cash out there just looking for a place to go.

So why hasn't anyone plunked it down to make more gas?

Money to be made

The refinery shortage, cited by experts as a main culprit behind the recent record high gasoline prices of over $3 a gallon, has been a windfall for the oil industry.

Exxon Mobil (Charts, Fortune 500) made nearly $2 billion profit in worldwide "downstream operations," which include refining, in the first three months of 2007 alone.

The difference between what refiners pay for a barrel of oil and how much they can sell the products for, known in the industry as "crack spreads," has tripled in the last 12 months, according to Antoine Halff, head of energy research at Fimat in New York.

"Refinery profits have really been ballooning over the last few years," said Halff.

The cash bonanza has generated some interest.

"I get calls from everyone in the universe," said Peter Beutel, an oil analyst at the consulting firm Cameron Hanover.

But he said so far he hasn't heard of anyone building a new refinery.

A call to the Environmental Protection Agency, which is involved in the permitting process for new refineries and refinery expansions, didn't turn up any evidence of a new refinery permit. A spokesman there said refinery expansions are more likely, although the agency was still searching its database at the time of this article.

Louisiana, a state long friendly to oil and gas interests, is actively seeking a new refinery.

Marathon Oil (Charts, Fortune 500) has built a $3.2 billion refinery expansion, Valero (Charts, Fortune 500) has a $1 billion expansion, and the state is in talks with the Kuwait national oil company for a massive new 500,000-barrel-a-day facility, said Michael Olivier, secretary of Louisiana Economic Development.

But even in Louisiana, where Olivier said the Marathon expansion permit was approved in less than a year, no completely new refinery has been built nor are there solid plans for one.

Source: CNN MONEY