A disappointing post from De la Where.

"Now some of my readers like to tell me that the reason we have high gas prices is because we don't have enough refineries."

Only those with a rudimentary understanding of economics.

"A great arguement except for the whole supply/demand thing gets in the way of it."

This makes absolutely no sense. The price is high because demand is high which creates scarcity. Flood the market with more oil and the price will go down. Really this is absolutely the most basic principle in economics.

"the whole elastic/inelastic thing really puts a kink in it too b/c don't you think that if the refineries and the oil companies new they could charge you more buy having less refineries they would?"

Again, no. The oil companies are making money and would like to make more money. Demand is inexhaustible. Any increase in supply will be quickly consumed. Increased consumption leads to increased profit margin. The difference between profit and profit margin is key and often ignored. Margin is a more accurate measure of how much a given company is earning. It is the difference between the cost of supplying a good or service and the money generated by doing so.


I sell one gallon of gasoline for $1.10. It costs me $1.00 to get that gallon to market. My profit is $.10 and my margin is 9%. The price of oil goes up and I now sell a gallon of gas for $2.20 and it costs me $2.00 to get that gallon to market. My profits are now $.20 and my margin is still 9%! My profits have doubled but my company is no more profitable than before. An increase in supply will drive the price down but widen my margin. It is in my best interest (Remember: I'm the gas company) to increase supply. It makes me more money.

"They learned many, many, many years ago that they had the whole supply/demand thing wrong."

So...the laws of economics do not apply to oil companies?

"Started allowing refineries to shut down, started consolidating the business. Companies started getting bigger and forcing others to go bankrupt. Then over the years they got closer to controlling the supply/demand part of the business. Now shockingly we are running at 99% productivity/output in the refiners and oil companies are raking in profits."

Don misses this one too. As demonstrated above, the oil companies do not want to rely on the current infrastructure. They want more capacity. The actual reason for the consolidation of refining capacity has to do with ever tightening EPA regulations along with an increase in global demand and periodic artificial shortages (1970's oil crisis). The Evil Oil companies were told they had to meet stringent emissions requirements. In many cases it was either not possible or not economically feasible to refit the existing refineries to meet those standards so they closed. Refining is a very capital intensive business. There were very few small players in the market that were unable to stay in business not because they were run out of the business by the big guys, but rather, because of the low profitability of the enterprise.

That noted mouthpiece for the GOP, US News & World Report talked about this here.


"Congress was back at the drawing board last week, working on a new energy bill to expand domestic oil and gas drilling and to encourage new refinery construction, mainly through the most dramatic rollback of the Clean Air Act since its 1970 enactment. But even if the legislation passes, it could take years before it reduces the tightness of the nation's energy supply. And that effect is likely to be modest, since most of the world's oil and natural gas is still outside the United States.

Refining historically has been the low-profit end of the business. As a result, the nation's current refining capacity of 16.9 million barrels per day, up from the mid-1990s, is still down 9 percent from the 1981 peak, with 175 refineries closed since then. Although the industry now rakes in cash--one estimate has its profits up 255 percent over 2004--refiners have realized only 5 cents on the dollar since 1990, half the profitability of oil exploration. Small, so-called teakettle operations have shut down, and giant companies have fled the industry.

Then there's the " NIMBY"--not in my backyard--problem. No one, it seems, except residents of Louisiana and Texas, wants a refinery as a neighbor. The industry also maintains that part of the reason for its low profit margins (thereby crimping investment in new capacity) is that it had to spend $47 billion in the past 10 years on new clean-fuel requirements and expects to spend an additional $20 billion. "It's just running in place," says John Felmy of the American Petroleum Institute. Unable to find any U.S. partners to build a new refinery here, the Saudis instead are partnering with Exxon Mobil on a $3.5 billion refinery in south China. If U.S. demand remains strong, Exxon Mobil may end up shipping refined gasoline from China to the United States--at higher prices, of course, to U.S. consumers. "I don't think we like to make hard choices," says Frank Verrastro, director of the energy program at the Center for Strategic and International Studies.

So, the Clean Air Act is mentioned as a specifically as a means of decreasing cost and increasing production. (Hint: those two lead to lower prices and more supply). Second, refining is cost and capital intensive causing companies to flee the market. Third, nobody wants a refinery in their backyard so we actually shipping gasoline from China. Any guess as to whether that will make the price go up or down?

Stephen Den Beste did a whole series on oil and power. He's a very smart guy. Smarter than you and me put together. Start here and read this and this and this.

Here's Donviti again:

"do you think that is some accident?

spare me.....it will take 10/15 years to build another refinery in this country. Politics at is best....."

No, it's market forces. Don also forgets that this is a global market with dramatic increases in demand from China and India that is only going to go up and not down. That pressure on demand increases prices and it has nothing to do with SUV's, Bush, Haliburton or Iraq. Additionally, OPEC can send oil through the roof any time they choose. They have only to reduce capacity or cease selling oil to us altogether. The former would cause major, major problems for us and the latter would probably be construed as an act of war and end very badly for them.


Popular posts from this blog

My Entire Career in a nutshell

Sean Thomas Lugano