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One reporters take on gas pricing, refining capability

Posted by gary__ (My Page) on
Thu, Sep 8, 05 at 10:03

Big Oil, Big Lie, big profits

The Kansas City Star
8 September 2005

Last week, as supply shortages sent the price of gasoline soaring, federal officials charged with protecting consumers quietly approved yet another oil industry merger.
Because of Hurricane Katrina news, the merger earned hardly a mention in the general press, though it created the nations largest oil refiner. And yet by giving its blessing to Valeros $8 billion purchase of Premcor , the Federal Trade Commission not only reinforced its reputation as a patsy for the energy industry but demonstrated a stunning lack of political sensitivity.
Although the FTC and its staff never seem to make the link between industry consolidation, rising energy prices and record profits, Wall Street investors surely can. Over the past year, shares in Valero are up 226 percent, which, as the Financial Times pointed out last week, makes Google (only 186 percent) look like a laggard.
Listen to what Valero chief executive Bill Greehey had to say in announcing that the deal had closed: "We are in a new era for refining where I believe you will continue to see higher highs and higher lows for both product margins and sour crude discounts. And now, with 18 refineries, no one is better positioned to benefit from this than Valero."
Translation: This deal will do nothing for consumers, but its a home run for investors.
Heres the situation: Refineries in the United States produce about 18 million barrels of refined product a day for an economy that consumes about 21 million. A completely new refinery hasnt been built in this country in nearly 40 years. Although Valero and others have spent $47 billion over the past decade to expand existing capacity by 13 percent, demand has grown even faster.
The reason that supply has not kept up in this industry, as in others, is simple: The industry makes more money that way. And one way the industry is better able to enforce this gentlemans agreement against investing too heavily in new capacity is by reducing the number of players.
The FTC uses a different analysis. Its staff members find no evidence that this merger or any of the dozens of others they have approved gives the acquiring companies the power to raise prices. After all, even with this latest refinery deal, no company controls more than 13 percent of the national market or more than 20 percent of a region.
But that analysis misses the point. As long as the industry can coordinate its investments, keep supplies tight and free-ride on OPEC price fixing, there is no need to unilaterally raise prices.
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 Dick Cheney during the California energy crisis. It turned out that our energy maven vice president didnt know what he was talking about and that the real reason for skyrocketing prices was that Enron and others were secretly manipulating the market by withholding supply.
In the case of oil refineries, theres no doubt that 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, Valeros chief operating officer declared he wasnt interested. When you look at industry rates of return, he told The Posts Justin Blum, its just not worth it.
This is the oil industrys other Big Lie. Every year, Fortune , 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 its been even higher. And over the past decade, the return on equity in the sector has averaged 16 percent, well above the investment hurdle rates in most other sectors of the economy.


Follow-Up Postings:

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RE: One reporters take on gas pricing, refining capability

Another take on this problem is that the EPA has made things too difficult for much needed new refineries.
We do have a huge country - I can see no reason why with cooperation from the government that new refineries cannot be built.
Maybe the definition of the word "cooperation" escapes these people.
I do know that "truth" is apparently an unknown...Sadly, I do not believe anyone....
We do need a home grown supply of oil, and we have it ..
Corn oil or Rapeseed oil(Europe), this, IMO, will be taking over in the next 20 twenty years...

And we can never again allow so few,(OPEC for one) to control so much of a important resource...


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RE: One reporters take on gas pricing, refining capability

According to this reporter, that's not the issue. They're making all the money they can with what they have. Give them the property, take away the regulations, they still have no incentive to build more. It costs them to build, they will sell no more product, and what they do sell could potentially cost less. Not a win for them. The jist of the story is there's an oil cartel in control of the raw material. There is a developing cartel (through mergers) in control of refining the product. No competition on either end. Stockholders and oil shieks win, consumers loose. That's not what free markets or capitolism is about.


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RE: One reporters take on gas pricing, refining capability

face the facts, your going to pay the price per gal. that your charged, you may complain, but your going to pay, 2.98, 3.20,3.50 4.00, whatever. the population of the u.s. are enslaved to the autmobile so pay your money, and worship your 4 wheeled god!


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RE: One reporters take on gas pricing, refining capability

Gary, in the end, capitalism may well prove that it's stronger than the industry and its lobbyists. One thing that's going on right now is that there is a tremendous amount of oil exploration by smaller oil companies. Oil that wasn't even profitable to pump out of the ground at $30 a barrel may be very profitable at $60 or $70. So high prices will bring an increase in supply, which will work to bring prices down.

But I agree with the article's premise that approving another oil industry merger was a dumb idea.


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RE: One reporters take on gas pricing, refining capability

Another take on this problem is that the EPA has made things too difficult for much needed new refineries.
We do have a huge country - I can see no reason why with cooperation from the government that new refineries cannot be built.
Maybe the definition of the word "cooperation" escapes these people.

I think the definition of "cooperation" escapes us. I'm no apologist for the EPA or the current regim^h^h^h^h^hAdministration. But the hoops and rings of fire that must be jumped through to create any kind of powerplant, be it an oil refinery or a generating station, makes construction quite slow and amazingly expensive. EPA regulations are only a part of it.

Sure, the U.S. has lots of space. But there are many of us who would like to keep those spaces open and unsullied. I don't particularly want an electric powerplant or an ethanol-producing plant or the like in my neighborhood (they just closed down here a noisy, noxious ethanol plant that had no business being within city limits). Nor do I love my car enough to want to destroy the Alaskan wilderness or Oregon forests to put up oil wells and refineries.

So I use biodiesel. I light with compact-fluorescent lamps. I try not to buy stuff with too much plastic. But it's a choice we all have to make. We cannot keep increasing consumption without increasing production or making ourselves increasingly beholden to those who do have the production capacity. We have met the enemy on this one, and he is us.


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RE: One reporters take on gas pricing, refining capability

I don't think anyone wants any type of industrial plant in a residential neighborhood, but there's also a point where people have to be reasonable. Right now all over the country you have many people moving out to the country, and then they gripe -- and in some cases even file lawsuits -- about smelling manure from farm fields and livestock operations. People move near airports and then they want the airport shut down because they hear airplanes. It's ridiculous.

You're right, the EPA is the least of the problems. They have specific regulations, and anyone who wants to build something can look up the relevant rules and decide whether it is or isn't possible to meet them. But the lawsuits filed by people to hamstring almost every proposed project are a much bigger problem. Even in places such as Indiana which are economically depressed and literally crying for more economic activity, as soon as anyone proposes anything, there are two or three pressure groups quickly organized to fight it. People do not even take time to gather information and make an informed decision; they read a newspaper article saying this or that is proposed, and instantly they're opposed to it.

Personally, I'd rather live next to a factory or a power plant than to people who are closed minded and opposed to everything.


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RE: One reporters take on gas pricing, refining capability

We will have to send some people over to the much more crowded European countries and see how they do it.
I'm sure much can be learned with regional planning and even individual rights vs society's rights..

And I could not agree more with Cowboyind - its about time the writers left the boiler-rooms and reported only the truth.....


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RE: One reporters take on gas pricing, refining capability

Until `the American people wake up and quit being bamboozled by media hype and take back control of our government from the oil cartels. These high prices are going to be the norm. The media hacks report on a so called oil crisis during the 12 noon news and the price jumps 30 cents by 4pm. Just a request from the president that US citizens start a voluntary gasoline conservation program would causes prices to drop. Also any government funding of some serious alternate energy source research would cause a price drop. However, so far all I have heard is the joke of a national energy bill and silence. So get ready for more porking by the oil cartel.


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RE: One reporters take on gas pricing, refining capability

Just a request from the president that US citizens start a voluntary gasoline conservation program would causes prices to drop. Also any government funding of some serious alternate energy source research would cause a price drop. However, so far all I have heard is the joke of a national energy bill and silence. So get ready for more porking by the oil cartel.

Follow the money. The current Administration has made a lot of it with oil. How quickly do you think they'll call on Americans to use less of it? Or to seriously fund any alternative fuel which will cut the larger oil-refining and distributing companies out of the market? Or to have even less of a reason to be invading and manipulating certain Mideastern countries?

It pains me to sound this cynical, but I have completely lost faith in the current Administration and in the half of the U.S. which excuses all of this. At a time when long-held American freedoms are being compromised in the interests of "fighting terrorism" and maintaining "national security," doing nothing to lessen our dependence on oil-laden countries run by other corrupt theocratic regimes strikes me as somewhere between irresponsible and criminal.


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RE: One reporters take on gas pricing, refining capability

Steve, I do 100% agree witg you. Not even a peep about financing serious alternative energy research. Methods have been developed to make gasoline from garbage, extract it from milkweed sap etc, they just need fine tuning. Not a dime of goverment money for research in this area. Yet we can waste billions and young lives on a senseless war in Iraq. However,a majority of the US public believed the hype and voted for this course, now we all suffer and will continue to do so. while the oil cartel holds all the cards they are going to pork the US public big time as long as possible.


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RE: One reporters take on gas pricing, refining capability

No one has mentioned the fact that the big three oil companies' stock has DOUBLED, in the last year... The week after Katrina hit one of them went up another 2 points.

Just my 2 cents,
Rita


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RE: One reporters take on gas pricing, refining capability

gas prices are back down now, its all forgotten. was just a bad dream. nothing to worry about people, go out buy a hummer.


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RE: One reporters take on gas pricing, refining capability

$2.59 for regular gas, $3+ for diesel is back down?


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RE: One reporters take on gas pricing, refining capability

thats about the best its going to get most likely. we had to shut down our pipeline for 15 hrs, yesterday due to lack of product, same thing 4 days earlier.


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RE: One reporters take on gas pricing, refining capability

betcha ya'all wish you had stock in the oil companies now don't ya? how many of you writing and reading this have stock portfolios? anybody have any oil in those? do you use mutual funds? most have oil companies in there.
I do not use funds, but I wish I had added a few oil companies to MY portfolio...
John


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