The ultimate NIMBY effect: gas prices
I was listening to Valero‘s second quarter conference call today, and while I’m sure that the prospect of another big oil company reporting all time record earnings will upset the likes of the Expose Exxon crowd, the downside of supply and demand is that darn supply-side sometimes can bite you in the ass when it comes to driving your ass around.
A couple of tidbits that were mentioned during the call… Valero’s refining is running at capacity, and likely will for the rest of the decade. Tight supply and demand leads to “the highs are higher, and the lows are not as low.” And in a weary tone, as if they were tired of repeating the same thing day after day for twenty-five years or so, they pointed out that there is plenty of low quality crude on the market, but not enough refining capacity to process it and get it out the door and into your tank.
This point gets mentioned in almost every discussion on gas prices, but is probably the most easily dismissed in favor of more easily politicized arguments like, “big oil is gouging the consumer!” Unfortunately it’s the truth. The most recent oil refinery to open in the U.S. was Marathan Ashland’s in 1976. Why haven’t more been built? Simple – NIMBYs. Nobody wants the big, smelly industrial sites occupying that valuable coastal land. And what local leader who wants more than one term in office is going to stand up and say, “To hell with your beaches and fishing pier, this land needs to be given to big oil!” The phrase “political suicide” comes to mind.
While most people think about NIMBYs on the local level, the refinery shortage exhibits on a national scale the impact of poor land use planning and the results of what happens when nobody’s backyard is the right backyard for development. The effect can be felt from coast to coast, fillup to fillup. Perhaps the next time mother nature clears out a bit of coastal land, instead of sending millions of dollars to rebuild as residential areas, it should be set aside to actually make an impact on this country’s economy. Rezoning by nature. Time-deferred landbanking. It could work, but it’s probably more likely that the U.S. annexes Cuba and turns it into Refinery Island. Hey…
http://releases.usnewswire.com/GetRelease.asp?id=52755
SANTA MONICA, Calif., Sept. 7 /U.S. Newswire/ — The Foundation for Taxpayer and Consumer Rights (FTCR) today exposed internal oil company memos that show how the industry intentionally reduced domestic refining capacity to drive up profits. The exposure comes in the wake of Hurricane Katrina as the oil industry blames environmental regulation for limiting number of U.S. refineries.
The three internal memos from Mobil, Chevron, and Texaco (available at http://www.consumerwatchdog.org/energy/fs/ show different ways the oil giants closed down refining capacity and drove independent refiners out of business. The confidential memos demonstrate a nationwide effort by American Petroleum Institute, the lobbying and research arm of the oil industry, to encourage the major refiners to close their refineries in the mid-1990s in order to raise the price at the pump.
“Large oil companies have for a decade artificially shorted the gasoline market to drive up prices,” said FTCR president Jamie Court, who successfully fought to keep Shell Oil from needlessly closing its Bakersfield, California refinery this year. “Oil companies know they can make more money by making less gasoline. Katrina should be a wakeup call to America that the refiners profit widely when they keep the system running on empty.”
A year old press release referring to internal memos from the mid 90s? Obviously these documents haven’t had much of an impact on anything. If there were criminal charges to be made, it would have happened by now.
The economic situation in the mid 90s was different from today. If a company is losing money on a product (any product) due to excess supply, you cut back on production. As demand increases, prices increase. If the price gets too high, you either produce more or get undercut by competitors.
Fast forward to today where most of the refineries are running at or near capacity. Now, when we need more refinery capacity it can’t be built. Not to mention global demand is increasing, causing crude prices to rise, which account for almost half the cost of a gallon of gas. Also, don’t forget that the various governmental entities make more off a gallon of gas than the oil companies.
I didn’t say that criminal charges were to be brought forth against the company. What I am saying is that the oil companies advocated reducing their own refining capacity in order to maintain a steady demand, regardless of supply levels. This avoids downward price fluctuations that negatively affect the bottom line.
It’s not that complicated nor hard to believe. Especially when you have the memos in front of you that detail their plans.
Since the mid-90’s, we have seen steady increases in price as demand rises regardless of the supply levels. We’ve also seen record profits from the oil companies as these policies have significantly worked in their favor. Of course, this doesn’t bother me as an Exxon Mobil shareholder but, it is what it is.
More refining capacity can be built and should be. The Congress actually included hundreds of millions of dollars in incentives for the the oil companies to build more refineries on former military installations in the last energy bill.
We could build a refinery for Exxon ourselves and they wouldn’t use it. Doing so would hurt the bottom line.
“We could build a refinery for Exxon ourselves and they wouldn’t use it. Doing so would hurt the bottom line.”
Sorry, I just don’t believe that. Global demand has increased dramatically since the 90s. While the oil companies may have needed to reduce supply then, they need to increase it now. Bigger refiners aren’t trying to shut down smaller refiners now, they’re trying to buy them to increase their own capacity.
Oil companies often get the bad rap because their prices are the easiest consumer good price to watch go up. How many other goods’ prices are posted on huge signs on every other street corner? Inflation-adjust gasoline per-gallon prices have trended down between 1918 and 2002 and price changes in gasoline have increased at a rate far slower than school tuition, childcare, healthcare, rent, housing, and food in the last 25 years. Energy companies make less per dollar of sales than the banking, pharmaceuticals, software, household producs, and real estate industries. Of those industries, how many of them involve extracting their core raw material from less than desireable locations around the globe, are extremely difficult to transport, can cause massive environmental damage if mishandled, and involve some of the least plesant working conditions to actually produce the end product?
Nobody is going to have pity on any company that makes billions of dollars per year, but it is what it is and needs to be put in perspective with other industries. All businesses do what they can to control prices and be profitable, and regardless of price increases, the demand for oil-based products continues to increase at a rate that outpaces supply increases. Sure, the government is increasing incentives, but how many locations in the U.S. are jumping up and down shouting “Build here! Build here!” and having their calls go unanswered?
Sources:
http://api-ec.api.org/filelibrary/Historical%20Trends%20in%20Gasoline%20Pump%20Prices%201918-2002.pdf
http://www.conocophillips.com/newsroom/other_resources/energyanswers/oil_profits.htm
http://www.reason.org/commentaries/moore_20050901.shtml
You have some good points, Derek.
The same people whining about the oil companies ripping them off are the same folks who drive a zillion miles a day and are too dense to make the connection.
What really pisses me off are those “OMG BOYCOTT EXXON-MOBIL GAS STATIONS” chain emails written by people who have very little understanding of the energy industry.
It’s like a smack addict accusing the dealer of being the primary cause of his addiction problem.
The easiest way of stickin’ it to the energy-man is to consume less energy! Duh!
Simple solutions like:
Don’t be a lead foot on the way to and from work… Use a bike or walk when possible….carpool or use public transit if possible and reasonable…don’t ever leave the engine idling for long periods of time….live closer to work, within reason…drive a fuel-efficient car…
Alas, it’s much easier to blame a big corporation for all problems than to do those simple things listed above.
See, Gabe? We do agree on some things. 🙂