US refinery limits could mean oil shortage despite abundant supplies

The United States could face an oil shortage even with ample supplies of oil. That possibility is raised by a recent government study that has added to a growing debate within the energy industry: Can US refiners process enough crude oil into the fuels Americans will need in coming years?

The National Petroleum Council, a federal advisory committee to the secretary of energy, warns in a report published earlier this month the US refineries are not being modernized quickly enough to cope with progressively lower-quality crude oil. As oil becomes heavier and higher in sulfur content, refineries must be upgraded. But the level of investment now planned will "not be adequate" to keep the US supplied with petroleum products in the 1985 to 1990 period, and may be insufficient as early as 1982, the report asserts.

How Congress and President-elect Ronald Reagan respond next year to the scheduled removal of certain federal regulations on refiners is another issue that could affect supply. The regulations will expire Oct. 1, 1981, at the same time price controls on domestic oil are lifted.

The nation's small refiners worry that without some regulatory protection to help them stay competitive with big refiners -- usually owned by major oil-producing companies -- they will be squeezed out of existence. That could cause energy shortages in some parts of the country, contends Raymond F. Bragg Jr. of the American Petroleum Refiners Association, a trade group representing small refiners.

Small refiners, defined as those that process fewer than 175,000 barrels of oil a day, have prospered under the existing federal entitlement allocation programs. These programs have kept small and independent refiners supplied with oil during shortages, and made sure they can buy crude oil at a competitive price.

Large refiners generally like the prospect of no federal controls on their industry since it would likely benefit them most, and help them raise more capital to upgrade and modernize their facilities.

Congress already has held hearings to determine what type of federal policy will best ensure that US refiners will be able to meet US oil needs. A number of analysts expect this to be one of the most controversial legislative issues of 1981. It could be an important test of President-elect Reagan's commitment to decontrol of the US energy industry.

"The problems of the automobile and steel industries are great. But when you talk about the ability of the refineries to produce enough energy products, you're talking about the basic underpinning of the whole economy." says a staff counsel with the House Energy and Power Subcommittee.

Both imported and domestic oils are heavier and contain more sulfur than they did in years past, and the trend is expected to continue over the next decade. A typical example: The large Amoco refinery in Texas City, Texas, processed only low-sulfur oil in 1973; today, 60 percent of the refinery's feed stock is high-sulphur crude.

At the same time, demand for asphalt and heavy industrial fuels is dropping. There are greater quantities of these petroleum byproducts when high-sulfur oil is processed. But road construction has slowed asphalt use, and industry and utilities are being urged not to burn oil.

What Americans will continue to need most are the more expensive products like unleaded gasoline, diesel fuel, and home heating oil. "We are processing higher sulfur oil and trying to yield higher quality products. It is a combination that is putting the crunch on the domestic refining industry," explains Edward Grigsby, an executive with Philips Petroleum Company.

Since the larger, more sophisticated refineries are usually better equipped to process the higher sulfur oil, some energy industry officials argue that any pricing or allocation program that cuts profitability or the large refiners is not in the nation's best interest.

"The investment needs are going to be pretty staggering," says R. W. Baldwin, president of Gulf Oil Refining and Marketing Company. He argues that small refiners would have a hard time staying in business in an uncontrolled market, and wonders whether the government should help them if they cannot survive on their own. "It's like the situation with Chrysler. . . . Do we save them or not?" he says.

Mr. Bragg, speaking for small refiners, warns that small and independent refiners provide 30 percent of the domestically produced petrolem products, and without them the coutry would have to import more refined energy products.