In fact there was quite
a dustup several years ago when Shell shut down a refinery in Bakersfield, CA which as the article says the FTC (that is, the Bush Administration) determined was not going to have an effect on supply or prices--something that anyone with a passing understanding of Economics would laugh out loud at.
According to The Economist, the problem is also one of shifting demand:
Quote:
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Originally Posted by The Economist, "Double, double, oil and trouble" 5/29/08
The problem is exacerbated by a growing mismatch between the type of oil being produced and the refineries that must process it. The most common benchmark prices, including the one used in this article, refer to “light” crude, the least viscous sort, which produces the most petrol and diesel when refined. “Heavy” oil, by contrast, yields more fuel oil, which is used mainly for heating.
At the moment, diesel is in short supply and there is a glut of fuel oil. That makes processing heavy oil unprofitable for some refineries, since the gains from diesel are outweighed by losses on fuel oil. As refineries turn instead to lighter grades, it pushes their prices yet higher. The discount on heavier crudes has risen to record levels. But even then, points out Ed Morse, of Lehman Brothers, another investment bank, Iran is having trouble selling the stuff. It is storing huge quantities of unsold oil on tankers moored off its coast.
Presumably, Iran and other heavy-oil producers will eventually be obliged to drop prices far enough to make processing the stuff worth refiners' while. In the longer run, more refineries will invest in the equipment needed to crack more diesel out of heavy oil. Both steps will, in effect, increase the world's oil supply, and so help to ease prices.
But improving an existing refinery or building a new one is a slow and capital-intensive business. Firms tend to be very conservative in their investments, since refineries have decades-long life-spans, during which prices and profits can fluctuate wildly.... Worse, new kit is becoming ever more expensive. Cambridge Energy Research Associates (CERA), a consultancy, calculates that capital costs for refineries and petrochemical plants have risen by 76% since 2000.
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The oil companies do indeed like to keep capacity at a razor's edge of the demand:
excess capacity is a direct deduction to the bottom line. Moreover as demand increases, they get immediate short-term benefit from the "shortages" although they do have pressure on them to keep from being to obvious--as with the first link above--from being the target of accusations that they are intentionally taking capacity off-line in order to cause the panic among traders that causes prices to spike.
One of the key unintended consequences of acquiescing to the demands of large corporations like the oil companies to allow them to "achieve economies of scale by merger" is that markets with a small number of participants can lead to each of the entrants realizing that *tacit* cooperation is just as good at causing market manipulation as *active* collusion in manipulating the prices in markets.
For some reason, even economists have not been very vocal about this because there is a fear among them about the uncertainty of the true effect of economies of scale and how many entrants are really required to provide true competition in markets and the effect of perturbations based on individual countries allowing their own native companies to consolidate and dominate the world markets.
Not for nothing that its called the
"dismal science"....
First rule of Economics 101: our desires are insatiable. Second rule: we can stomach only three Big Macs at a time.
Buffy
