The plot evaporates

As a frequent critic of the news media, particularly at the local level, it was impossible to resist needling the local newspaper, in a 2007 column, which was also intended to reflect the industry’s views on certain things:

“Data suggest oil industry squeezes supply”
Houston Chronicle, November 26, 2006

This “news” may come as a surprise to those companies working as flat out as any company in any booming industry ever did. Ignoring a few inconvenient truths (to borrow a phrase from global warm-monger Al Gore), the Associated Press (AP) thinks it has uncovered another plot that would explain high gasoline prices more persuasively than supply, demand, and regulation.

This one is particularly over the top. “Why would Shell Oil Co…simply close its Bakersfield refinery? Why scrap a profit maker?” an AP “analysis” asks. It turns out that it wasn’t scrapped but sold, a business decision the company would have sound reasons for making.

As further argument for the existence of the plot, the AP quotes a construction worker “[The industry] ain’t trying: That’s more money for them.” Making more money by trying less is a novel economic theory (and a fantastic daydream), but the AP did not allow this person to develop his thesis further.

The AP did wobble back into mainstream economics by exposing the shocking fact that businesses like high prices. “A handful of very large companies realize it’s in their mutual interest to keep prices as high as possible,” said an “energy expert” at the consumer group Public Citizen (founded by Ralph Nader, as the AP took the trouble to point out). It may also shock the AP and Public Citizen to learn that more than a handful of companies of every size like high prices. They just can’t have them in perpetuity because free markets won’t let them.

Then there’s regulation. As this is written, Environmental Defense v. Duke Energy is before the US Supreme Court. This case is the result of the EPA’s retroactive application of a part of the Clean Air Act, the New Source Review (NSR), to upgraded or modified facilities even if there was no increase in emissions. For many years, the EPA applied NSR to new facilities only. Now, suddenly, electric utilities are on the hook for billions of dollars in fines.

If adequate electrical power at a stable price is the goal, this is not the way to get it. The refining business operates in a similar regulatory environment. Perhaps Shell thought there was better opportunity or less unpredictable risk for shareholders in an endeavor not subject to the same extent of regulation by whim. The article even admits, “[Shell] says it could make more money on other projects.”

So, is this alleged scheming actually creating an artificial bottleneck in refinery output that will increase fuel prices? Here’s the answer, in the same newspaper, two days later:

“Big expansion points to role of Gulf refining”
Houston Chronicle, November 28, 2006

This article notes projects planned or under way that total 580,000 b/d of additional crude oil processing capacity among three Gulf Coast refineries as well as an increase of 2.45 million gallons of additional gasoline and distillate production per day at two other US refineries. It also cites Motiva’s Port Arthur refinery, which is preparing to double its capacity to 600,000 b/d. This could make it the largest refinery in the United States by 2010.

Public Citizen and the AP are in for yet another shock. One of Motiva’s joint venture partners is Shell Oil Co.

Leave a Reply