Refining capacity limits

Just a quick blog, hopefully.

I was thinking about the argument that the current bottle-neck in gasoline production is refining capacity rather than oil extraction capacity.

The argument is muddied by different quality levels of oil as well. The supplies of "light sweet crude" may not be much above the refining capacity, while "heavy sour crude" may have much easier production increase possible, IF there was capacity to refine it (which takes modifications to existing refineries that process the sweet crude).

From the point of view that world production of light-sweet crude has now either peaked or is damn close to peaking suggests expanding capacity for this nicest crude is not very useful.

I don't know what's needed to refine heavier crude, and perhaps it is just about "adding new stages" to the process, or perhaps new refineries need to be designed and built to process the new heavier crude.

So I accept some changes are needed to refineries, but equally I'm thinking that it is not necessarily a bad thing to limit refinery capacity based on the idea that we'd like to transition away from oil (somehow!) If you build wider highways, you get more traffic. If you build more refineries, you'll get more oil consumption. If we had a national plan to halt increase oil consumption, then we should work that plan into evaluating refinery capacity.

On the other hand, of course limiting capacity means arificial scarcity and higher prices. Producers and refiners benefit from this. A better approach is to reduce demand and let refiners make their own decisions based on our goals in consumption.

Higher energy taxes and transitioning costs

How can we transition from cheap to more expensive energy?

I accept that higher prices alone are certainly sufficient, if not pretty way to transition. High prices by supply failing to meet demand is one way, and equally and better, higher taxes on nonrenewable energy does the trick also, with a little more control.

However higher prices in either way cause undue hardship to those on the edge of economic viability. If we're talking businesses, like flower delivery, and costs can't be passed to customers, perhaps many such businesses will die or scale back. If we're talking people being able to drive to work or heat their homes in the winter, then there's a need for government to offer some aid.

One such aid might be like "food stamps". We could have subsidized "gas stamps" for poor people. Having subsidy is dangerous, especially if widely used by a large portion of the population, and doesn't help long term if prices keep rising. However it is more justified in canceling out high taxes, if we had them, which we don't know.

For instance, if we imposed a national $2/gallon gasoline tax ("gradually imposed", say $0.25 rise per quarter for 2 years), we could balance that by giving "gas stamps" to poor people that would offset the excise tax portion of the cost perhaps.

Equally for natural gas usage. We could raise a NG tax, while offering varied discounts for different usage - from home heating, to electricity production to industrial uses.

Perhaps free market people will gasp as such attempts to manage the market, but the reality is that any resource that is "underpriced" compared to higher priced alternatives has "monopoly power" and an unlimited incentive for unsustainable expansion. Higher prices will moderate expanding uses and give alternatives greater access to the market.

I accept it's a messy business, subjective and prone to favoritism, and as always politically will have pressure to unfairly punish and reward certain uses and users.

The airline industry for example makes it clear. The long term reality in my view is that airtraffic must be reduced as energy costs rise. This means any subsidies offered to airlines are ultimately just delaying their contractions. However even with this projected reality, I accept perhaps short term subsidies might be helpful to transitioning into the new market conditions. So fuel taxes might be reduced or delayed to avoid harming an already contracting market.

Anyway, I am happy to recognize this tool. I can encourage higher taxes, while still admitting the need for temporarily subsidizing or waiving taxes for those most harmed immediately. Such an offer will allow more meaningful reactions to be made. By that I mean if we applied higher energy taxes based on those most harmed, we'd never have the heart to move forward.