The Finch Formerly Known As Gold

30 August 2007

The last summer drive

Not surprisingly, it will cost you:

[Gas prices] throughout the Plains and much of the Midwest are far above the national average. Industry analysts blame the higher prices in the region on a series of refinery outages, a Coffeyville, Kan., refinery that flooded earlier this summer, a large refinery outage in Illinois and the fire at the Wynnewood [OK] refinery in late spring.

All of which is true. But try this scenario on for size: let's say, just for the sake of argument, that the NIMBY issues could be resolved, that the Sierra Club were to issue a statement calling for more refineries, that various regulatory obstacles were temporarily (or even permanently) displaced. Do you think we'd actually get a sudden upsurge in refinery construction?

I'm thinking we wouldn't, for the simple reason that it would require some major capital investments, and oil companies, all else being equal, prefer to avoid major capital investments, lest the always-volatile oil market take a downward turn. And given the margins on gasoline production, which aren't exactly prodigious, they'd just as soon not bet the farm. Instead, they do things like buy back their own stock.

None of this, of course, is unexpected. And we all know what happens to companies with excess capacity: look at the US auto industry, which has been busy shuttering plants left and right. The "Something Must Be Done" crowd won't be happy about it, but I've lived through both of the energy "crises," and I'd rather have high prices and decent, if tight, supplies, than not-quite-so-high prices and hardly any supplies at all.

Posted at 1:31 PM to Family Joules


The oil companies are like anyone else the government uses as a whipping boy. When prices rise, they get criticized (and taxed!) for 'windfall profits'. So what happens then? Same thing that happens in the NYC area when the goverment institutes rent control: Rental untits stop getting built, supply drops, prices rise. When prices rise, some developers might take a flyer on building rentals - but not as many as should. Why? Because if they make a profit, they're 'greedy landlords'. (If they, or the oil companies, LOSE money, that's just the greedy landlord or greedy oil company getting what they deserve.)

However, the profit motive remains strong, and comes into play once there is a reasonable perception of a profit in sight. You linked a WaPo story lambasting the oil companies for not reinvesting in refineries. This is a perfect example of the resistance oil companies run into - no one wants a refinery in 'their neighborhood'. On the other hand, the discovery of new oil fields meets less NIMBY resistance (consider WHERE new fields tend to be found), and the company that holds the raw crude can sell to someone else willing to go to the headache of refining it. Thus the best/safest profit potential lies in finding new crude - and oil companies go to great lengths in this regard.

Posted by: Mister Snitch! at 3:36 PM on 30 August 2007

Not to mention the fact that exploration costs can be written off fairly quickly.

You can hardly blame Big Oil, or even Small Oil, for moving to maximize their returns, especially since certain segments of society really seem to resent them.

Posted by: CGHill at 5:08 PM on 30 August 2007

Oh, and here's a lovely example of supply and demand.

Posted by: CGHill at 5:27 PM on 30 August 2007

Good grief. The owner had better be careful -- people in this town are obsessed with gas prices, and he runs a fair chance of getting worse than graffiti and curse words.

Posted by: Andrea Harris at 6:51 PM on 30 August 2007

(This town being Orlando, for anyone not clicking on Charles' link.)

Posted by: Andrea Harris at 6:52 PM on 30 August 2007