American refiners reluctant to invest

By Richard Valdmanis

NEW YORK (Reuters) - Oil companies are reluctant to spend money to boost North American fuel production capacity, fearful that demand could slump under the weight of record gasoline prices, executives and analysts said at the Reuters Energy Summit in New York and Washington this week.

The situation, along with growing fears that fuel producers are unable to smoothly run their plants due to tougher environmental standards, signals that the continent may have to get used to high pump prices and rely increasingly on fuel shipments from abroad.

"It is almost self-fulling. If you're a refiner, you're reluctant to add capacity," said Ron Brenneman, chief executive of Petro-Canada (PCA.TO: Quote, Profile, Research, Stock Buzz), which runs two refineries in Canada. "By not adding capacity, you're keeping the market fairly tight."

Oil companies have not built a new refinery in the United States in about 30 years due to high costs and uncertain returns, and projects to boost production from existing plants have lagged demand growth. The last refinery built in Canada was in 1984.

The Bush administration has been trying to reduce U.S. dependence on oil shipments from the Middle East to shore up national security and has sought to encourage refiners to build new domestic plants.

But in the past year, energy companies, raking in record profits, have cut U.S. refinery growth plans by one-third, Guy Caruso, head of the U.S. Energy Information Administration (EIA), told the summit on Monday.

"They're saying, 'We maybe have to think twice about the pace of expansion, if indeed we're not sure the demand for the refined products is going to be there,'" Caruso said.

The industry has been discouraged by a push in the United States to slash gasoline use by producing domestic renewable fuels like ethanol, as well as rising costs for raw materials like steel and a tight labor market.  Continued...