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In region, an added threat on gas prices

Refinery closings could drive up costs

By Erin Ailworth
Globe Staff / March 5, 2012
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Gasoline prices, rising quickly across the country, could increase even faster in New England over the next year because of the shutdown of three refineries that serve the Northeast and the likelihood that another could close in the summer.

Economists estimate that the loss of these plants, which account for at least half of the East Coast’s refining capacity, could boost New England gas prices by as much as 15 cents per gallon - over and above increases driven by unrest in the Middle East and other global factors. The additional price increases would result largely from added costs of transporting fuel from Gulf Coast or overseas refineries.

The price of diesel and heating oil, which also are refined at the facilities, could rise as well.

“If they can’t get [replacement supplies], your prices are going to spike,’’ said Phil Flynn, an oil analyst with PFGBest in Chicago.

The more Northeast refineries that close, the more vulnerable New England becomes to higher prices and supply disruptions because of its lack of energy infrastructure, said John Felmy, chief economist at the American Petroleum Institute, an industry group in Washington.

“You don’t have refineries in New England, you don’t have pipelines,’’ Felmy said. “You’re really an island.’’

Refiners are shutting plants after losing billions of dollars in recent years due to a combination of factors. The weak economy lowered demand for gasoline, tighter environmental regulations raised costs, and increased global competition squeezed profit margins.

In the last six months, oil production companies Sunoco Inc. of Philadelphia and ConocoPhillips Co. of Houston have each closed a Pennsylvania refinery and put it up for sale - with few potential buyers emerging - as they exit the refining business. Hovensa LLC, a refiner in the US Virgin Islands, closed a refinery on St. Croix that primarily supplied the East Coast.

Meanwhile, Sunoco also has put up for sale a facility in Philadelphia that accounts for about nearly one-fourth of East Coast refining capacity. Sunoco, which says its refining business has lost nearly $1 billion in the past three years, plans to shutter the Philadelphia refinery in July if no buyer is found. “We could stay in the refining business and put the entire company at risk,’’ said Thomas Golembeski, a Sunoco spokesman, “or we could exit the refining business and stop the financial losses.’’

Gas prices are at record levels for this time of the year, largely driven by fears that tensions with Iran could disrupt oil supplies. Prices for regular gasoline have jumped more than 40 cents a gallon since the beginning of this year in New England and the nation. Last week, regular gas averaged $3.72 per gallon nationally, $3.77 in New England, and $3.68 in Massachusetts, according to the US Energy Department.

The closing of the refineries - assuming no buyer appears to reopen the shuttered Pennsylvania facilities - could add 5 to 10 cents a gallon to gasoline in New England over the next several months, Flynn estimated. If the Philadelphia refinery also closes, the premium could rise to at least 15 cents.

Chris Lafakis, an economist with Moody’s Analytics, a forecasting firm in West Chester, Pa., also estimated the refinery closures could bump prices 10 to 15 cents over the next six months to a year. “It could be sufficient to raise gasoline prices to $4 per gallon, on average,’’ Lafakis said.

New England has no refineries of its own to take up the slack. Gulf Coast refiners have extra supplies to offset the loss of production in the Northeast, but pipelines that carry gas, diesel, and heating oil from the Gulf Coast to the region do not necessarily have capacity for the additional volume, according to an analysis released last week by the Energy Department.

Other transportation can be considerably more expensive. Shipping petroleum by train, for example, can cost 40 cents a gallon, compared with 4 cents by pipeline, according to industry officials. Transportation and marketing expenses account for about 6 percent of the cost of gasoline at the pump, according to the Energy Department.

Ultimately, the region needs to expand its pipeline capacity, which would require significant investment, said Joe Petrowski, chief executive of Cumberland Gulf Group in Framingham, a major Northeast fuel distributor.

“The reality on the ground is, we are in a carbon world right now whether we like it or not and we have to deal with it,’’ Petrowski said. “And to deal with it, respectfully, we have to start building infrastructure so we can access cheaper supplies.’’

Right now, the best hope for local drivers would be a reopening of the shuttered refineries, but that appears unlikely. Rich Johnson, a spokesman for ConocoPhillips, said the company, which closed its Trainer, Pa., refinery in September, said it will shut the facility permanently if a buyer does not emerge by the end of this month.

Sunoco’s Golembeski said no refinery operators have expressed interest in restarting the Marcus Hook, Pa., facility, which closed in December, and the company does not know if it will be able to sell the Philadelphia refinery. Hovensa shut its St. Croix refinery in February to convert it to a storage facility.

Erin Ailworth can be reached at eailworth@globe.com. Follow her on Twitter @ailworth.

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