Duh of the Day: Oil companies keeping supplies tight to improve profits.

I suppose there are people out there for whom this is news, but it seems relatively obvious to me:

WASHINGTON – The oil-refining industry might have helped create a gasoline market that’s so tight that some industry experts and critics say any hurricane, pipeline break or other disruption is likely to cause price spikes.

During unprofitable times in the 1990s, some refiners’ internal memos show they wanted to reduce refining capacity to boost profits. The industry dismisses those memos’ significance – and the notion it tightly controls supply – but ultimately, its investments in refining capacity haven’t kept pace with the growth in demand.

Today, there are fewer refineries and fewer, but more profitable, refining companies.

The bit about the memos being downplayed by the companies is interesting. Further along in the article we come to this bit:

An internal 1995 Chevron memo relays the warning that an energy analyst made at an American Petroleum Institute convention: “If the U.S. petroleum industry doesn’t reduce its refining capacity, it will never see any substantial increase in refining margins,” which are earnings divided by operating revenue.

Similarly, a Texaco executive in 1996 complained of “surplus refining capacity” and wrote that “significant events need to occur to assist in reducing supplies and/or increasing the demand for gasoline.”

I’m sure there’s a perfectly reasonable explanation for all of that, right?

API’s chief economist John Felmy called the statements “purely musings” and said it’s “utter nonsense to argue that we’re tightly controlling supply.”

“We’ve expanded capacity over the last 10 years, the equivalent of a new refinery every year,” Felmy said. “But these radical groups will come up and say things that are fundamentally untrue.”

Then we should have an overabundance of capacity now, right?

The Federal Trade Commission, in its investigation of post-Katrina gas prices, found no evidence suggesting that companies refused to sufficiently invest in new refineries to tighten supply and raise prices in the long run. Instead, the agency said the evidence suggested that further investment would have been unprofitable.

Indeed, refining capacity increased by 12 percent since 1987. But U.S. demand for gasoline increased by 28 percent. Refineries are now using almost all of their capacity, compared with 83 percent in 1987.

The U.S. refining companies that stayed in the business – 55 in 2006 compared with 188 in 1980 – are seeing the rewards.

ExxonMobil’s refining and marketing segment ended last year with a 40 percent profit increase. The top independent refiners and marketers collectively scored a 92 percent increase.

“We have grown, and we’ve been in the right business at the right time,” Rich Marcogliese, Valero’s executive vice president of refining operations, said in an interview. “It is a great time to be in refining because the supply/demand balance for refined products is tight with good margins.”

Sounds like maintaining a tight supply line to me.

2 thoughts on “Duh of the Day: Oil companies keeping supplies tight to improve profits.

  1. Now where are those anticompetition cartel lawsuits?
    Oh but I forgot that corporations weren’t crowned into power when Standard Oil was dismantled as trust.

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