Shell, one of the world's largest oil companies, said Friday its decision to expand the refinery will increase U.S. supplies of gasoline, diesel and jet fuel.

Shell plans to boost the Port Arthur refinery's capacity to 600,000 barrels of crude oil per day by 2010 from the current 275,000 barrels per day.

Shell estimated that the expansion, the biggest in more than 30 years, would cost about $7 billion.

The Anglo-Dutch company operates the refinery with Saudi Refining Inc., a subsidiary of Saudi national oil company Saudi Aramco, in a venture called Motiva Enterprises LLC.

Major oil companies have canceled plans to build new refineries or greatly expand current ones for many years because of environmental opposition and because the profit margins on refining crude oil were too thin.

The Shell-Saudi expansion will occur at an existing plant, however, making it easier to obtain the necessary permits. Workers have already begun sinking pilings into the soil where major units will be built.

And refining margins have rebounded since 2002. Shell is betting that they will remain strong along with high prices for crude oil, analysts said.

"If they didn't think the future is going to be better than the past, it makes no sense," said Fadel Gheit, an oil industry analyst with Oppenheimer & Co. "The outlook must have improved. This is meaningful and needed."

Gheit said, however, that Shell's move is unlikely to push other oil companies to greatly expand their U.S. refineries. He said steady but small increases -- "capacity creep," as oil executives call it -- and more use of ethanol could satisfy U.S. gasoline demand, especially if fuel-mileage standards are toughened.

A government advisory panel led by retired Exxon Mobil Corp. Chief Executive Lee Raymond reported recently that while global demand for oil could grow sharply, U.S. oil consumption could fall by 3 million to 5 million barrels a day if vehicle fuel-efficiency standards are doubled by 2030.

The companies, however, expect demand for gasoline to continue growing -- even with oil surging past $80 per barrel.

"Demand for the product is growing in the U.S., and actually demand exceeds the current refining capacity by quite a bit, up to the point where we have to import about a million barrels a day," said Rob Routs, Royal Dutch Shell's executive director of refining.

The expansion at the Port Arthur refinery would add about 1.7 percent to U.S. capacity, according to government figures.

When the expansion is complete, Saudi Refining will supply at least half the additional crude oil and Shell will provide the rest, said Stan Mays, a spokesman for the Motiva joint venture. He said the Shell share could come from oil sands in Canada or supplies in South America.

Officials said the refinery will be able to handle thick or "heavy" oil and "sour" crude, which is high in sulfur.

Saudi officials have considered building a refinery in the Dominican Republic to rapidly increase access to the U.S. market. It was unclear whether Friday's announcement takes that option off the table, Mays said.

The Shell-Saudi Refining venture has been considering a major expansion at Port Arthur for some time, and it grew more serious within the past year.

Shell had not previously publicly put a cost estimate on the project, although there were widely reported estimates from local officials that the project would run about $4 billion.

Routs acknowledged that labor and material costs along the Gulf had increased but said the project remained very attractive.

Shell estimated the project will create 4,500 construction jobs and 300 production jobs. It has substantial local support. "We're feeling wanted," Routs said.

At 600,000 barrels per day capacity, the Shell-Saudi Refining project would be larger than Exxon Mobil's nearby Baytown plant, which is now the largest U.S. refinery at 562,500 barrels per day.

The Port Arthur refinery was expanded in the 1970s and '80s. Saudi Refining bought a stake in 1989, and Shell became an equal owner in 2002. The plant was knocked out of production by Hurricane Katrina in 2005, and was operating at less than full speed Friday because of a loss of power during Hurricane Humberto.

The last new refinery in the United States was Marathon Oil Corp.'s plant in Garyville, La., which opened in 1976. Houston-based Marathon recently announced a $3.2 billion project to raise capacity to 425,000 barrels per day, an increase of 180,000 barrels per day.

Still, many other projects have been scrapped or delayed, and the American Petroleum Institute has scaled back its capacity forecast.

Shell's U.S.-traded shares fell 58 cents, to $83.62 in trading Friday.

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