Friday, September 09, 2005

Supply and Demand

A common conservative talking point is that there are too few refineries because of environmental regulation. The Foundation For Taxpayer & Consumer Rights has documents that say otherwise:
An internal 1996 memorandum from Mobil demonstrates the oil company's successful strategies to keep smaller refiner Powerine from reopening its California refinery. The document makes it clear that much of the hardships created by California's regulations governing refineries came at the urging of the major oil companies and not the environmental organizations blamed by the industry. The other alternative plan discussed in the event Powerine did open the refinery was "... buying all their avails and marketing it ourselves" to insure the lower price fuel didn't get into the market.

An internal Chevron memo states; "A senior energy analyst at the recent [American Petroleum Institute] convention warned that if the US petroleum industry doesn't reduce its refining capacity it will never see any substantial increase in refinery margins." It then discussed how major refiners were closing down their refineries.

The Texaco memo disclosed how the industry believed in the mid-1990s that "the most critical factor facing the refining industry on the West Coast is the surplus of refining capacity, and the surplus gasoline production capacity. (The same situation exists for the entire U.S. refining industry.) Supply significantly exceeds demand year-round. This results in very poor refinery margins and very poor refinery financial results.
Some of these documents look like they might cross into restraint of trade, violations of federal law. Astute readers may remember that Mobil and Chevron are former parts of Standard Oil, and that Texaco is a subsidiary of Chevron as of 2001.

A common practice for Standard Oil was to buy up it's competitors' products at below market rate to drive them out of business or reduce their stock value enough to take them over, then raise prices and sit pretty. Sounds like someone at Mobil (formerly Socony, Standard Oil of New York) remembers the way the game is played.

If indeed the API was acting as a conduit for the industry to reduce refining capacity across the board, it would be a violation of anti-trust law, since it wouldn't be hard to show harm to the consumer, the standard criterion for prosecution under the Sherman Antitrust Act, and all that would be necessary is to demonstrate a "contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations."

Now, I don't want to jump the gun. It may be that there was no conspiracy, no price fixing on a grand scale. The Chevron document is the most compelling argument for a conspiracy, and I think it's weak; after all, it isn't illegal to listen to a guy talk. The question is who that guy talked to. The Mobil memo reeks of restraint of trade and looks to my unsophisticated eye like a violation of section 2 of the Sherman Act.

FTCR points out that the regulations Mobil discusses were advocated by the industry itself, not by environmentalists.

Here's the economic argument. If all the refiners reduced their capacity in roughly equal amounts, it would be in the interests of each party to keep a little extra capacity. This is simple game theory. The only way you get around a situation like that is with some sort of collective agreement. But such an agreement would be illegal. Just something to ponder as you think twice about driving to the store.