Market Inefficiencies II: Oil Refineries
by Jon Shea
6 September 2005
I had a nice discussion with Anthony (who, I hope, is a future Collaborator) about this last night.
The conventional wisdom these days is that oil refineries are a bottleneck in our gasoline supply. The United States doesn’t have enough refineries to make all of the gasoline we want to use.
Question 1: Why doesn’t someone make more refineries?
Answer 1: It seems that the barrier to entry, in this case, is strict environmental regulation. Refineries work by boiling the oil into gasses, and distilling them fractionally. A lot of those gasses go floating away (and smell bad).
My Question: Why would you want a refinery in the US anyway? I think I’d much rather set up my refinery in Mexico or North Africa or anywhere that 1) I could pay my employees $.25 an hour and 2) there weren’t air quality regulations.
Why Don’t We Import More Gasoline? My guesses are:
1) For some reason gasoline is hard to ship. Maybe it explodes too easily, or something. Counter evidence: We DO import some gasoline.
2) Gasoline standards are heavily localized and boutiqued, from state to state, and sometimes county to county. If you want to sell gasoline across the US you need thousands of different variations of gasoline. Obviously, if you’re trying to fill an enormous boat with gasoline to sell this is going to present some logistical challenges.
Apologies for the inconsistent style. Caffeine intake, I’d guess.
Sep 7, 08:35 PM
Another question. Shouldn’t knocking out a few refineries drive the price of a barrel of oil down, given that demand for oil is dropping?
(And that would in turn, I assume, lower costs for the remaining refineries and put some downward pressure on the price of gas, though maybe not enough to present gas prices from rising overall.)
Yet that didn’t seem to be the case immediately after Katrina. Oil prices went up. I’m probably missing something here… Because of shipping difficulties perhaps?
Sep 7, 11:15 PM
Brad, I was thinking the exact same thing. If there are less refineries, then demand for oil should drop, and the price for oil should fall.
I have a few thoughts. First, if you believe Austan Goolsbee on Slate, then the US “as much as 25 percent of U.S. oil production and 10 percent of its refining capacity.” That statistic seems somewhat different than the CW, but it might imply that oil supply was reduced more than demand.
Similarly, my feelble Econ 1 trained brain is willing to think of oil production and oil refining as being compliments, like skis and bindings, or computers and operating systems, or right shoes and left shoes. You need both to have anything worthwhile. If the price for one goes up, the price for the other should go down (because the price of the total would increase, and so demand for the total would decrease).
But oil is an international commodity. It doesn’t matter where it comes from (except for a small factor of shipping costs), and it isn’t enough to consider the US as if it exists in a vacuum. If the price of gasoline has rissen irrationally high (and I think it has) then every refinery in the world will want oil in order to reap the profits, and the price for oil will increase.
On the other hand, if the market were perfectly competative, then this logic doesn’t work. We need to either come up with a increased demand for oil, or a decreased supply.
Sep 9, 06:35 PM
The day after Katrina (Tuesday), gas prices went up here (Missoula, MT) by anywhere from 30-50 cents per gallon. Since then they have come down by only about 10 cents.
I recently heard the govenor on the radio saying that in fact, Montana doesn’t import any gas from the gulf region. The refineries we rely on are in Wyoming and elsewhere in the west, and the crude they get apparently comes mostly through Vancouver.
He was not pleased with the oil companies.
Sep 18, 01:45 PM
If you want to know how much price gouging is going on then watch the value of Exxon Mobil (XOM) on the NYSE. They are the biggest and the most profitable of the internationals. (shell is close) Also remember that gasoline price is somewhat determined by expected future price of crude oil (NYMEX).