Oil Companies May Suffer Under New US Congress

[TheNiche]

Lots of refineries near Port Arthur and New Orleans, though. So there is great potential for disruptions in supply of refined products.

Yeah, but like I mentioned, oil and refined products are all tied in nicely to the global supply chain. So by the time that our inventories began to wear thin, we could be assured that more tankers would've arrived with all the chemical goodies that we need to keep on living the American way of life.

Natural gas, on the other hand, is very difficult to transport long distances, so if there's a shortfall, we have to make up for a lot of it it ourselves, and what can't be done with inventories is done by price rationing.

This is why NG is more volatile than oil of gasoline.

[westguy]

You should know better than to blame it on "environmental red tape." That is a red herring. Profits are skyrocketing because the prices have gone up. It is cheaper to sell gasoline when it price is high, than it is to increase the supply by investing in new refineries.

[TheNiche]

You should know better than to blame it on "environmental red tape." That is a red herring. Profits are skyrocketing because the prices have gone up. It is cheaper to sell gasoline when it price is high, than it is to increase the supply by investing in new refineries.

Let us consider your reasoning.

You believe that refining profits are skyrocketing because the prices have gone up. That is categorically false. Within all of the U.S. except possibly Hawaii, refiners operate in a state of near-perfect competition. I'll let you read up on it. There are minor imperfections such as relate to plant locations, but each refiner is a price-taker once the product gets to market. If there are no barriers to entry for producers and there have not been any shocks to the market, refining margins should be extremely low, the long-term average accounting profit adjusted for inflation and risk being probably about 2.5% to 3.0%. This is called zero economic profit, and it occurs such that the marginal costs that they incur from operations, inclusive of opportunity costs, are precisely equal to the revenues. The implication is that higher oil prices get passed on directly to the consumer as higher gasoline prices, but that refiners don't receive any benefit. In fact, the long-term implication is that they're hurt because consumers reduce their demand for the more expensive refined product relative to other goods, ceteris paribus.

In practice, however, it is not the case that marginal cost will equal marginal revenue. There have been significant regulatory barriers to entry coupled with economic shocks and a steadily growigh (yet unfulfilled) demand for refined products that have driven the cash operating margins higher and higher since 2001. Sources: Oil & Gas Journal/Muse, Stancil & Co./Institute for Regional Forecasting.

Investment in refining capacity is justified because the cash margins are higher (where economic profit >0), and you can see it occuring at existing sites, the ExxonMobil refinery in Baytown for instance, where permitting is not quite as difficult because an existing plant is already in place. However, for the most part, new plants are being located internationally. Despite the considerably higher level of political, war, and terrorism risk, it is still easier to place huge capital investments offshore, away from Uncle Sam's EPA watchdogs. (As a side note, I personally always get a laugh when environmentalists think that they've done the world a benefit by getting the feds to ban dirty industry in the U.S. in an outright form...because it usually just ends up being located in a more densely-populated area of a third world country where pollution controls are lax if they exist at all...so more people suffer, they suffer worse, and we pay higher prices and endure the risk of supply disruptions in the event of political turbulence! )

But to conclude this gutting of your statement, you claimed that it would be cheaper to sell gasoline when prices are high than to increase the productive capacity. This is easy to defeat: we do both. Refiners keep their plants at maximum capacity utilization and create new refining capital. At least, that's what they'll do in a market that has not been distorted by barriers to entry.

...personally, I wonder how much has been contributed to political causes to limit refinery expansion by refinery owners, themselves, who are banking on the fact that higher barriers to entry will increase the value of their existing capital. But that is not a topic that I'm prepared to delve into, so I'm going to stop here.