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 nation’s largest oil refiner. And yet by giving its blessing to Valero’s $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 it’s a home run for investors.
Here’s 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 hasn’t 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 gentleman’s 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 didn’t 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, there’s 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, 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 , 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, the return on equity in the sector has averaged 16 percent, well above the investment hurdle rates in most other sectors of the economy.

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

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

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.

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.

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

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.

Just my 2 cents,
Rita