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Cost may block energy
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May 17, 2001: 4:38 p.m. ET
Higher prices needed to justify more oil refineries, utility plants, say analysts
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - Unless consumers start paying more for their energy needs, the new oil refineries and electric generating stations called for in President Bush's proposed energy policy may not be built, according to some of the analysts who follow different sectors of the energy industry.
The analysts say that it is the economics of the situation as much as environmental regulations or other governmental red tape that has stopped construction of these facilities. And changes in the economics of the industry will not necessarily follow new regulations proposed by President Bush on Thursday.
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 CNNfn's Tim O'Brien reports on the energy plan and the reactions. |
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"I wouldn't recommend a stock of a company building a generating plant in California right now," said Curt Lauer, analyst with Credit Suisse First Boston. "With all the questions about rates in California, if you're a utility executive, you have to ask yourself what kind of returns do you need to do something economic for yourself, your company and shareholders."
The California Public Utility Commission agreed Tuesday to raise rates an average of 47 percent, but protected 60 percent of residential consumers from rate hikes.
Mark Easterbrook, an analyst for Dain Rauscher Wessels, said he believes those rates may be enough to build new plants, but concerns about the political environment in the state and calls for the state government to take over some power plants will probably stop anyone from starting plans to build new plants through at least this summer.
"I think on a going forward basis, the prices are there," he said. "If the political environment improves somewhat, which I think it will as we get out of the summer, I think there will be construction. But it's going to take two years to get plants sited, approved, and constructed, before the power plants come on line.
"I think the (Bush energy) plan over the longer term should help solve the problems out there," Easterbrook added. "But over the short-term, there really are no solutions."
The same type of economic squeeze is keeping new oil refineries from being built, said Fadel Gheit, oil analyst of Fahnestock & Co. With current refineries already operating close to capacity, even if there were additional supplies of either domestic or overseas crude oil, it wouldn't significantly increase the supply of gasoline, Gheit said.
He added that the integrated oil companies are trying to move away from the refining side of the business because of narrow margins and volatile prices.
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"Even if we give them the green light, no company I know of, that can afford to spend the money is willing to spend it," he said. "They are getting out of the refining business because they consider it a black hole."
Those factors won't change unless gasoline moves above $2 a gallon on a consistent basis, he said.
Archie Dunham, CEO of Conoco Inc., told CNNfn's Street Sweep that he believes the plan will help with new plants as it clears away some of the current regulatory hurdles.
"The changes being recommended by the president will at least give us incentive to expand our refineries in the United States going forward," he said. "That's something we didn't have previously."
But Bill Greehey, CEO of independent refiner Valero Energy Corp., which may soon be the second largest refiner of gasoline in the nation, told CNNfn during an appearance earlier this month that it is economics, not regulations, stopping construction of new refineries at this stage.
"It's cost prohibitive to build a grassroots refinery, even if the environmental regulations allowed you to do it," he said. "The economics just don't work." 
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