With little stock cushion to absorb unexpected changes in supply or demand, regional problems can arise from temporary or permanent losses of refining capacity, or pipeline disruptions, particularly since there is little or no excess U.S. refining capacity available in the summer. However, imports cannot function as a relief valve for tight gasoline markets as effectively as in the case of distillate, since few overseas refiners make the summer grade Phase II gasoline that is required in many parts of the United States. The prospect of regional supply problems is also increased by the differing regional gasoline product requirements, arising from Federal and State air quality programs, which limit the distribution system's flexibility to respond. On the positive side, though, it is expected that with a year's experience behind them, the refining industry's ability to make the Phase II reformulated gasoline first required last year should be improved. Finally, I would like to expand briefly on U.S. refining capacity.
Refineries usually run at their peak capacities when gasoline demand is highest during the summer.
In 1997 we saw for the first time, a situation where a temporary shortage at the end of the summer could not be resolved with an increase in domestic production because operating refineries were running at very near full capacity. Last summer, while individual refiners ran at full capacity, the industry as a whole did not run as high as we have seen historically. This was generally due to a 550,000 barrel per day increase in operating capacity since 1998. While this suggests some potential for higher domestic gasoline production this summer, any incremental production will necessarily be quite small, given that further capacity growth in 2001 and 2002 is not expected to be significant. For almost 20 years, we have had an excess of refining capacity in this country, but that is no longer the case.