View Full Version : Big Oil Limits Competing Refineries

Ian McColgin
09-08-2005, 08:03 AM
We have people on the forum parroting the Limbaugh Lies that refinery capacity has been limited by some sort of Greeny-Lefty plot. The press release C&P's below is well soursed and helps establish that environmental regulation is not, after all, the culprit here.

9:00 AM CONTACT: Foundation for Taxpayer and Consumer Rights
Jamie Court, 310-392-0522 ext 327; Tim Hamilton, 360- 495-4941

Internal Memos Show Oil Companies Intentionally Limited Refining Capacity to Drive Up Gasoline Prices

SANTA MONICA, California - September 7 - The Foundation for Taxpayer and Consumer Rights (FTCR) today exposed internal oil company memos that show how the industry intentionally reduced domestic refining capacity to drive up profits. The exposure comes in the wake of Hurricane Katrina as the oil industry blames environmental regulation for limiting number of U.S. refineries.

The three internal memos from Mobil, Chevron, and Texaco (available at http://www.consumerwatchdog.org/energy/fs/) show different ways the oil giants closed down refining capacity and drove independent refiners out of business. The confidential memos demonstrate a nationwide effort by American Petroleum Institute, the lobbying and research arm of the oil industry, to encourage the major refiners to close their refineries in the mid-1990s in order to raise the price at the pump.

"Large oil companies have for a decade artificially shorted the gasoline market to drive up prices," said FTCR president Jamie Court, who successfully fought to keep Shell Oil from needlessly closing its Bakersfield, California refinery this year. "Oil companies know they can make more money by making less gasoline. Katrina should be a wakeup call to America that the refiners profit widely when they keep the system running on empty."

"It's now obvious to most Americans that we have a refinery shortage," said petroleum consultant Tim Hamilton, who authored a recent report about oil company price gouging for FTCR. (Read the report at http://www.consumerwatchdog.org/energy/rp/ )

"To point to the environmental laws as the cause simply misses the fact that it was the major oil companies, not the environmental groups, that used the regulatory process to create artificial shortages and limit competition."

The memos from Mobil, Chevron and Texaco show the following.

 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. Read the Mobil memo at

 An internal Chevron memo states; "A senior energy analyst at the recent API 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. Read the Chevron memo at

 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. Significant events need to occur to assist in reducing supplies and/or increasing the demand for gasoline. One example of a significant event would be the elimination of mandates for oxygenate addition to gasoline. Given a choice, oxygenate usage would go down, and gasoline supplies would go down accordingly. (Much effort is being exerted to see this happen in the Pacific Northwest.)" As a result of such pressure, Washington State eliminated the ethanol mandate - requiring greater quantities of refined supply to fill the gasoline volume occupied by ethanol. Read the Texaco memo at


cedar savage
09-08-2005, 08:44 AM
You need some basic education in oil economics.

Start here. (http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/Refining_text.htm)


They weren't making much money during the time frame your link references. Hard to attract investors when the ROI is low or negative. Especially during the late 90's, when there was a lot more money to be made, with a lot less grief and uncertainty elsewhere.

During the 1990s, the rate of return on investment for refineries averaged about 4 percent. That is about a third of the return earned by most American industries. Another way to look at this is that from 1998 to 2000, the whole petroleum industry earnings as a percentage of sales were 4.6 percent while banking had an average rate of return of 12.7 percent, telecommunications 9.4 percent, utilities 6.1 percent and overall manufacturing, 5.6 percent. Those numbers help explain the reluctance of companies to make the investments required to expand refinery capacity. (http://www.ftc.gov/bc/gasconf/comments/murphyedward.htm)

George Roberts
09-08-2005, 08:48 AM
A lot of memos get written in all businesses. I am sure that the oil companies would like to have more control over prices but ...

With hindsight it appears that less supply and higher prices 10 years ago might have led to more conservation and perhaps better supply and prices now.

cedar savage
09-08-2005, 08:56 AM

Conservatives believe that environmental regulations have a lot to do with those low profits. They're wrong. A large oil refinery costs $4 billion to $6 billion to build. The installation of "best available control technology" is a very small part of that figure. (http://www.cato.org/research/articles/taylor-050603.html)

So, Norm, what about the price controls program, or earlier the Mandatory Oil Import Quota Program? What was the long-term impact of these mandates?

Or do you think a $5 billion investment should sit around underutilized?

[ 09-08-2005, 10:00 AM: Message edited by: cedar savage ]

Dan McCosh
09-08-2005, 09:01 AM
A speech from a lobbyist who can't say two sentences in a row without contradicting himself seems a doubtful source of objective analysis.

Ian McColgin
09-08-2005, 09:14 AM
Good heavens. Something from Cato with which I agree!

Actually, good analysis is good analysis. I've learned a lot about market functions from Marxist economists as well. One may shape the story a bit to help the pre-arrived at policy conclusion and economists working for competing interests may emphasize different parts of the factual situation in an effort to denigrate their opponents, but competancy with facts is still a major asset.

09-08-2005, 10:42 AM
Isn't collusion to fix markets illegal under anti-trust laws whatever the motivation?