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Gas Refineries at Shaky Output Level

PALM SPRINGS, Calif. -- Oil industry expert Tom Kloza said Tuesday that "there is a 50/50 chance or better that the second half of the summer we'll see a (major refinery breakdown), which could bring gasoline prices up to recent highs or surpass them by 10 or 15 or 20 cents a gallon," reported the Palm Springs, Calif.-based Desert Sun.

Kloza's remarks came during a media conference call in which he compared this summer to last year's, when an August pipeline disruption sent gasoline prices through the roof during a time they normally settle.

Gasoline prices are currently on a downward trend that has lasted most of June. Kloza, director of editorial content for Oil Price Information Service, said the 2004 gas market is characterized by a clash of "staggering" rises in demand and lagging production. "We have less gasoline inventory today than we did in 1983, when the population was smaller and there was less demand," he said. "It makes the market extremely volatile."

The volatility is easiest to see on the wholesale spot market, where prices can swing wildly just on the basis of a rumor. Last week, the Los Angeles spot market rose 30 cents after rumors of problems in three West Coast refineries. The spot began to slip back down this week. But Kloza said the sudden rise was worrisome. "It's very troubling, because the nature of the beast in the last few years is to have refinery events that are much more significant," he said.

This current gasoline atmosphere is a nightmare for consumers but a time of huge profits for the oil companies, which are benefiting from the unbalance of supply and demand, said Kloza. "I think most refiners who have stepped up to talk about this would acknowledge that they are in the midst of a renaissance that they have not seen before," he added.

There are 13 refineries in California that produce the state's blend of reformulated gasoline. Before deregulation of the industry in 1981, there were 41 refineries owned by 30 companies. The cut in refineries has made it very difficult for oil companies to keep up with demand, but it has helped spur the companies to huge profits in recent quarters.

In addition, Shell Oil will close its Bakersfield refinery this year, leaving California with just 12 refineries. Several analysts believe such a move would drive prices well past $3 per gallon next summer.
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