“The industry likes to explain away the lack of adequate refining capacity by arguing that government regulation makes building a refinery virtually impossible. The last time we heard the “government regulation” excuse, it was from Vice President Cheney during the California energy crisis. It turned out our energy-maven vice president didn’t know what he was talking about, and that the real reason for skyrocketing prices was that Enron and the others were secretly manipulating the market by strategically withholding supply.

In the case of oil refineries, there’s no doubt that, given voters’ natural antipathy to having a refinery in the neighborhood, finding a new site requires much time, money and patience. But when President Bush floated the idea last year of speeding site approval by locating new refineries on inactive military bases, Valero’s chief operating officer declared he wasn’t interested. When you look at industry rates of return, he told The Post’s Justin Blum, it’s just not worth it.

This is the oil industry’s other Big Lie. Every year, Fortune Magazine, in its Fortune 500 issue, calculates the rate of return on shareholder equity for each major industry. Last year, when oil prices were a lot lower than they are now, the average return for both independent refiners and integrated majors was 23.9 percent. This year, it’s been even higher. And over the past decade, according to Fortune, the return on equity in the sector has averaged 16 percent, well above the investment hurdle rates in most other sectors of the economy.”

The point is whether government should be giving these companies welfare, and whether the government has any power in reducing oil prices.

The Bush administration approved 33 takeovers totaling $19.5 billion, on top of 21 deals worth $7.3 billion under President Bill Clinton, Bloomberg data shows. Reduced supplies were already pushing up gas prices in Clinton’s term, according to a Federal Trade Commission study conducted after pump prices rose to more than $2 a gallon in Milwaukee and Chicago in 2000.
…
Under Bush, the FTC hasn’t tried to block any proposed refinery takeovers. During Clinton’s eight years in office, the government sued once to block an oil industry merger. In February 2000, the FTC sought to stop BP Plc’s $33.1 billion purchase of Atlantic Richfield Co. after concluding the combination could lead to higher prices of oil pumped from Alaska. BP completed the purchase in April 2000 after agreeing to sell oil fields in Alaska and terminals and pipelines in Oklahoma.

The rise in gasoline prices helped refiners generate the highest margins from refining crude oil into gasoline and other fuels in the first quarter since at least 1990.”

http://quote.bloomberg.com/apps/news?pid=10000103&sid=aI43GNSYkDDQ&refer=news_index

What was that about competition and the free market?

The government could have done more to ensure that the oil industry mergers of the last decade didn’t have such a detrimental impact on prices. Which is to say, the government should have done more to foster competition as the oil companies sought to reduce it.

Don’t the oil companies have a fiduciary responsibility to maximize profits? Legally, I think they have to. I’m not certain of this, but it sure does ring a bell.

Does anyone have more information on this? If I’m right, it should have a profound effect on the discussion.

Especially when it isn’t really capitalism. I love it when conservatives argue that this is all about supply and demand as if the oil industry hasn’t gone throgh a massive restructuring over the last ten years which has reduced competition between oil companies and lead to higher prices. The mergers began in the mid-1990s (and yes Clinton’s justice Department should have done more to slow or stop the mergers). Conservatives loves to accuse environmentalists of stopping the construction of new refineries. Why don’t they ever address the fact that the oil industry itself shut down refineries after a series of mergers to “reduce costs”?

“May 28, 2004

WASHINGTON  Consumers are facing higher prices at the gasoline pump in part because a wave of oil industry mergers over the last decade reduced competition, according to a government study released yesterday.

The merger of Exxon and Mobil in 1999  when the two companies were No. 1 and No. 2 in the industry  added up to 5 cents to the price of a gallon of gasoline sold by the combined company.

The General Accounting Office, an arm of Congress, looked at eight major oil industry mergers between 1994 and 2000 and found that six of them led to higher gasoline prices.

Some 2,600 mergers swept the oil industry since 1990, as firms sought to cut costs through economies of scale.

Refining capacity went from “moderately to highly concentrated” in the East Coast, and from “unconcentrated to moderately concentrated” on the West Coast, the GAO said.”

http://www.signonsandiego.com/uniontrib/20040528/news_1b28oil.html

Google “oil bust 1985″ or “oil bust”.

Oil sold for $40/barrel in 1979 and dropped to about $12/barrel by 1986. The bust was a disaster for independent oil companies from Alaska to Texas.

Moral: Capitalism sucks.

Gas was so cheap that the oil companies in the face of poor earnings and miniscule profits had to lay off tens of thousands of people. Smaller oil companies were forced to shut down.

Jay, could you fill me in on this? I mean, could you narrow it down to within a couple of years and tell me about some of these smaller oil companies that went bust?

I musta been out sick that day.

JayC, oil companies typically don’t lose much money when the price of oil is low. What they do is shut production down on wells where they don’t feel the production costs meet profit margins. When the price goes up they put these wells back on line to sell at the higher price. For instance if the price of oil fell to $17/barrel, oil companies might shut down half of their production because it just isn’t worth it for them to sell it at that price. This eventually lowers supply, and bingo.

They don’t lay off a lot of workers because a lot of that oil field service is done by outside companies like Halliburton.

Shorter Jay Caruso:’ I’m so into AWOL George, I show up on his colonoscopy.’

Please. The gas tax is used for whatever the legislators want to use it for.

More silliness from Jay Caruso. Since 1997, 85% of gas tax revenues have gone to the Highway Trust fund.

Wow. Flanagan is bringing up completely irrelevant drivel. What a shock.

First, Caruso advocates doing away with the Federal gas tax. To be sure, that would lower prices. But what Jay C. ignores about a gas tax is that it helps pay for the many negative externalities such as damage to the environment. The gas tax also helps pay for the maintenance and development of roads and highways.

Please. The gas tax is used for whatever the legislators want to use it for. Tax receipts are tax receipts. You say it’s for roads and highways. I say it’s for pork barrel projects. The issue is lowering prices and eliminating the gasa tax does that which you admit.

Second, Caruso attempts to argue that low oil prices caused oil company workers to be laid off. This is akin to arguing that someone can be too fit. What s important to realize is that when oil companies were laying off people in the mid-1990 s, the oil companies were still very profitable; they weren t losing money.

Your ignorance in such matters is astounding and I find it amusing that you allow it to be put on display so easily. Companies don’t lay off people when they are doing well. You go and tell all of the smaller oil companies and refineries that had to shut their doors that they weren’t losing money. Idiot.

I’m not going to waste my time with the rest of your post as your third point is more irrelevant nonsense. If you could ever discuss something with a little intellectual honesty it would be a miracle. The profit for oil companies on a gallon of gas is around 9 cents per gallon. You say “What baloney” bit offer nothing to refute such a point. Why? Because it’s true and the reason why I brought up the 9 cents is because you have the banshees around here screaming about PROFITS! PROFITS! as though it’s so horrible.

They resell it as gas for $5.

Right now if the oil goes up to $3 they resell it for $6.”

a barrel of oil=42 gallons. Light crude on the spot market goes for about $70/bbl today. That’s $1.6667/gallon.
The amount of gasoline you get out of a barrel of crude depends on the quality of the oil and the refinining method, but this DOE source http://www.eia.doe.gov/kids/energyfacts/sources/non-renewable/oil.html , says its about 19.5 gallons.
70 / $19.5 == $3.58 per gallon.

Obviously petroleum products produced from the remaining 22.5 gallons in the barrel are sold, but nevertheless Oliver’s economics and use of arithmetic are, well, let’s say imaginitive.

Let’s take Caruso’s points one by one. First, Caruso advocates doing away with the Federal gas tax. To be sure, that would lower prices. But what Jay C. ignores about a gas tax is that it helps pay for the many negative externalities such as damage to the environment. The gas tax also helps pay for the maintenance and development of roads and highways.

Second, Caruso attempts to argue that low oil prices caused oil company workers to be laid off. This is akin to arguing that someone can be too fit. What’s important to realize is that when oil companies were laying off people in the mid-1990′s, the oil companies were still very profitable; they weren’t losing money. In fact, several made what was then record profits. In addition, executive salaries at the oil companies went up.

Third, Caruso makes much about this 9.8 cent per gallon profit margin. What baloney. What Jay ignores is that gas is a pretty inelastic commodity–Americans have little choice but to pay almost whatever cost as there are few alternatives. And there is no product differentiation–the gas you buy at an Exxon station is no different than the gas you buy at the Acme Gas Station. In a competitive industry, one or more gas companies would drop their profit margins in order to make up the profits in volume. Think WalMart–WalMart sells the same products as everyone else but they make their profit on volume.

Oil companies do business the way they think they need to to prosper and survive. I happen to think they are in the process of losing a big public relations war; but if your idea is so easy, so doable, why don’t you guys get one of your many deep pocket billionaire financers to buy an oil company and run it per progressive principals. Would end the argument either way, wouldn’t it? Exxon $4 a gallon, Mobil $4 a gallon; People’s Gas $0.37 a gallon. I mean I can no longer claim progressives can’t run a heart attack-inducing, high saturated fat ice cream business, because compassionate fat mongers Ben and Jerry have done that very thing. Likewise, Progressive Insurance is out there and doing well. So why not an oil company? Instead of ruining other peoples’ businesses, why not do it yourself? Ice Cream to insurance to big oil. C’mon. Show us how its done.

Dugger

Oil companies have every incentive to keep the price of oil high JayC, and thus the price of gas.