Big Oil intentionally limited refining capacity?

Not sure what to make of this: http://releases.usnewswire.com/GetRelease.asp?id=52755

JD

Ize be getting really pissed right about now.

Thats Unpossible!!!

after some thought, I wondre if it’s maybe time to talk about serious federal regulation of the oil industry.

I mean, typically I’m not one to throw out “ONOS THE EVIL CORPORATIONS ARE MAKING MONEYS!!1!!!1”, but with our economy’s massive dependence on oil it might be time to recognize that what’s good for the oil company’s is not necessarily good for the country.

JD

If true, it’s Enron-esque.

I don’t have any trouble with them holding back on refinery per se, as in a capitalist market someone else would pick up the slack, and they’d just be cutting themselves out of profit.

Funny thing is, Oil doesn’t seem to operate like a free market. Why are there never oil price wars?

I think the word is “cartel.”

Oil price isnt set by the producer, but by the market. Petrol price wars happen, there’s always someone undercutting the big names at the petrol pumps.

Petrol wars happen? I don’t buy it. There are just too many across the board price jumps after newsworthy accidents and disasters, always much larger than the actual trouble should cause, and hitting immediately rather than when the actual cost to the oilman increases.

If it were a free market, after disasters like Katrina there’d be at least one oil company who didn’t play ball and kept his prices the same, probably one who didn’t have much Gulf drilling.

This is due to the energy being an inelastic commodity wrt. demand. It’s really that simple. The price is set by the market.

The story seems s00pa bogus. Boohoo, refiners made very little money in the 1990s so they started to shut down capacity to the bare bones levels to support their operations. A perfectly acceptable thing for the companies to do they should streamline their business to have as little uneconomical capital as possible. Boohoo that when a supply disruption occured they made a ton of cash. What do you want? Do you want a system why they have to use their capital in ways that are not economical to them?

Now if it could be proven that they colluded to reduce overall supply in an attempt to drive up prices then we would be talking but I do not see this in the linked documents.

The simple fact is that refining was a shitty business up until about 2 years ago. This is reflected in the stocks of refiners. Since it was a shitty business no one put the capital into refineries. Then demand cought up with capacity about 2 years ago and some refiners started to make some solid profits. Then a supply disruption hit ( Katrina ) and now they are making huge cash. Them’s the breaks in a market economy.

The not-in-my-backyard mentality and the excessive zeal of the EPA in regards to new refineries didn’t exactly help them either.

Right. I’m essentially calling oil companies an oligopoly, where the free market formulas you’re referencing don’t tell the entire picture.

In any event, I don’t see what refineries have to do with the price of gas right now. It’s just profiteering. Prices have gone up well in advance of any coming crunch, but won’t go down until after the crunch.

Sadly there is no public evidence of this to my knowledge.

The oil warehouses keep a substantial inventory on hand ( 21 days of inventory before Katrina, IIRC ) how are they supposed to price this inventory? Should they price it at the price at when they took in the supply? Unless they all take in the suppy at the same moment in time then they are doing to be price variatation and someone ( probably them ) will get screwed. So they price the inventory at the spot price. Now I don’t work in the industry so maybe this is all baloney but this is the story on CNBC.

Oil has an absolutely enormous barrier to entry, so it’s not that competitive.

As to the refining, wouldn’t be the first time firms with significant market power cut excess capacity to the bone to hold up prices. It’s especially nasty for inelastics.

A doesn’t imply B. Auto manufacturing, airlines, and semiconductors are all industries with huge barriers to entry that are also quite competitive.

There are a bizzilion little oil stocks out there ( especially Energy Trusts, yum, especially, IMO, those canadian ones ) so clearly there are a bunch of small crude producers. There are also a good number of large cap producers ( exxon, chevron, royal dutch, BP amoco, phillips petrol, marathon, occidental, burlington, apache, kerr mcgee, that’s the stuff that over 10B on the US market ). Yes, a handful of thses producers dominate a massive percentage of the market, but many sectors of the economy are like this. It sounds to me like this sector of the economy is diverse enough to be competitive. But I could be wrong.

“A handful of producers dominate of massive percentage of the market” is all you need for price-setting power, really.

“Auto manufacturing, airlines, and semiconductors” are only competitive if you compare them to a monopoly, but those are easy ones by comparision - note that there’s, what, really two airliner manufacturers now? Two PC CPU manufacturers?

Note I said “airlines”, not “airline manufacturers”. In any case, I don’t know what definition of competitive you’re using if you don’t consider the auto industry competitive. Or CPUs: Oligopoly? Check. High barrier to entry? Check. And yet the market exhibits the same characteristics of innovation and downward price pressure that one would expect from a competitive market.

Try telling that to AMD :)

Then the little producers should make crazy profits. Some do ok, others don’t. Right now though, most are doing pretty well.