Demand fears slow US refinery investment: API

By Erwin Seba

NEW YORK (Reuters) - Fears that soaring fuel prices will buckle U.S. energy demand are inhibiting investment in new oil refineries, the head of a trade group representing the largest U.S. energy companies said on Monday.

Big oil companies have faced political pressure to reinvest their record profits into new refining capacity as a way of pushing pump prices down from near-record heights. The Bush administration has called high gasoline prices a "crisis" for consumers.

"We do not feel these price levels are forever sustainable," American Petroleum Institute President Red Cavaney said at the Reuters Global Energy Summit. "Just as you have to be careful at the bottom of the economic cycle, you have to be careful at the top of the cycle. You can't with absolute certainty say demand is going to be there."

So far this year, API has seen demand for motor fuels decline "at the margins," API Chief Economist John Felmy said at the summit. The most recent monthly report from the API released last week showed U.S. oil demand in April fall 1.5 percent from a year earlier.

Felmy declined to say if deeper drops in demand could be expected as gasoline prices hover near $3.00 a gallon. A significant cut in demand would likely only come when consumers decide current gasoline price levels are "permanent."

American motorists burn more than 9 million barrels of gasoline each day, adding up to more than 10 percent of global petroleum usage.

Oil companies have announced plans to add 1.4 million barrels per day (bpd) in crude oil refining capacity at existing U.S. refineries by 2011. The Department of Energy has said other projects to be announced later this year should bring that expansion to 2 million bpd.

No new U.S. refineries have been built since 1976.

Once the 1.4 million barrels are added, U.S. refining capacity will be at an all-time high, Cavaney said.

In addition to the continuing challenges of obtaining a site and the necessary environmental permits, refiners face the challenge of financing a new refinery, which costs about $17,000 for each barrel per day of capacity.

Only one new refinery proposal has been announced recently, a $2.5 billion refinery proposed by Arizona Clean Fuels Yuma planned for a site in Yuma County, Arizona.

So far, that project has failed to get financing for construction, Cavaney said.

Refiners have invested $47 billion over the past 10 years to meet federal mandates for cleaner burning motor fuels, he said.