Big oil companies figured out long ago that they could make more money by

[Zinfandel]

making less gasoline!

That's why the industry hasn't built a new refinery in 30 years. Since deregulation in 1982, oil consumption's increased 33 percent, but oil companies have reduced refining capacity by about 10 percent. Why? They know the scarcer the product, the bigger the profit.

American oil companies love to blame OPEC for jumps at the pump, but OPEC's not to blame. It's American refiners. Three dollars per gallon of gasoline here is the result of domestic oil refiners intentionally cutting refining capacity and inventories. We don't have too little crude oil. We have too few refineries to process it. So why not have OPEC offer an all-you-can-eat special on crude?

1990s refiners realized they had to reduce supply to pump up profits, and that's just what they did. Oil companies love to blame those big, bad environmentalists for hurdles they can't overcome to build new refineries. But one memo showed Mobil actually advocated for tougher California rules to drive an independent refiner out of business. This year I had to fight to keep Shell Oil from closing an existing California refinery in the tightest market ever.

What's needed is not supply-side economics but supply-side regulation. The Department of Energy already monitors oil refiners. Why not grant its secretary emergency powers to force oil companies to make supply meet demand? That includes requiring oil companies to invest their recent world-record profits into making more gasoline.

Tax credits in the energy bill for increasing refining capacity, supply-side economics, won't help. Without being forced, why would oil companies build new refineries? Any industry that can make more money by making less of a product is going to stay the course. OPEC's offer to pump and refine more oil should make Washington wonder who's the real cartel.

http://www.consumerwatchdog.org/

[rockymountaindem]

1. That's the first thing we learned about monopolies and cartels in ECO105..

Monopolies and cartels don't make money by producing a lot of product and selling it for a little, they make money by producing only a little product and inflating the price.

A market controlled by a cartel or a monopoly is no more free than a market controlled by the government.

[lizziegrace]

2. Would someone explain this to my sister?

She keeps giving me the "it's the environmentalists' fault no new refineries have been built". I'm so sick of hearing it and her defending the big profit-hungry corporations when she can barely afford food now that fuel is so expensive...

Unbelievable.

edited for terrible grammar!

[SammyWinstonJack]

7. Sounds like she has her mind made up and won't have it changed.

Facts be damned. :shrug:

[xray s]

3. that's a monopoly for you

high cost of entry, concentrated ownership, inelastic demand.

a licence to steal.

[BlueEyedSon]

4. They haven't built any refineries because they know there is not

enough crude production to keep them running full out for any length of time.... IOW, they will not process enough oil to get a return on their investment.

A barrel of oil is 44 gallons. Do the math, the rest of the cycle from refining to retailing is not making that much $$$$.

If refining was the bottleneck, crude would back up and there would be a glut, and a freefall (in prices).

[charlie]

5. That's part of the story

US tax code long encouraged that behavior with the oil depletion allowance, then intangible drilling deductions. The profits were riper at the exploration and drilling end of the business, refining capacity was neglected as a result.

[KT2000]

6. bbbbut - they said it was

the environmental laws!!!
Yeah right.

[necso]

8. One shouldn't omit the

effects of speculators and speculation.

I remember incidents where oil refining capacity was diminished (but not crude oil production), and the price of crude oil shot up along with the price of refined products.

But a drop in refinery capacity doesn't make crude oil more scarce, or increase demand for it -- indeed, it makes crude oil more plentiful relative to the capacity to refine it -- rather, it is the speculators' linkage of these two commodities (in this way) that creates this effect.

And when you have the price of refined products influencing (in the same upward direction) the price of source raw material, along with the more normal influence of the price of source raw material on the price of its products, then you have a recipe for speculation-driven price increases that bear little resemblance to market theory.

But whether it is the (various) producers, the distribution network or the assorted middlemen (or whatever) that creates a supply "shortfall" (manufactured or natural, in fact or just perceived), where there is relatively inflexible demand (at least in the short term), speculators can be expected to exacerbate the problem. And it is exactly in areas of this kind of "shortfall", that easy, large profits ("windfall profits" -- of course, the "wind" can be expected to blow) are to be had.

And when shorting refining capacity, storage capacity or the distribution network (or whatever), all the principal parties involved are well aware of this. -- They just don't like to talk about it -- because then people might just get a clue as to how the game is really being played.