Sunday, September 02, 2007

Winners - Losers

Another tip of the hat to Owen, he provided a link to the information I needed to complete my thoughts on this post.

Big Oil conspiracy theorists will want to read this, I am enlisting in their cause today.

For many years, it has been my wacky contention that oil refiners do themselves no good service by performing proper maintenance on their refineries. No matter what the cause, any disruption in oil supply immediately leads to higher prices for consumers and increased profits for oil companies.

So what if a valve leaks, then burns, then shuts down a refinery for three months? That is all a part of a sinister plan to increase revenues for Big Oil.

Cato provides all the proof that I need.
Ask a free marketeer what government should do about rising gasoline prices and the usual reply is "nothing," because "high prices provide incentives to conserve and for companies to deliver new supplies." But as gas prices near all-time highs, consumers are hardly flinching.

Sure, they'll shake their fists at the oil companies if asked. But gasoline consumption is actually higher today (by 1%) than it was last year even though pump prices increased by 15% over the same period.

It seems that sellers can increase prices without harming sales a whit. A new study by energy economists at the University of California at Berkeley finds that from 2001 to 2006, a 10% increase in fuel prices typically reduced consumption by only between 0.3% and 0.8%.
Fast forward to 2007 ...
Oil giant BP announced Thursday it will back off plans to put more pollution into Lake Michigan, something the company has argued it needed as part of a $3.8 billion expansion to bump up production at its oil refinery in Indiana.

Company officials say public criticism has been so overwhelming they will not take advantage of a permit that would have allowed them to increase the amount of ammonia and "suspended solids" dumped daily into the lake. Illinois politicians were among the first to pounce after the State of Indiana gave the plan the green light in June, and the furor quickly spread to Congress. In July, the House passed a toothless resolution that called for "an end to dumping in the Great Lakes."
Nice try BP. I know the real reason for the change of direction. BP knows that increasing motor fuel supply in the Midwest will lower prices, meaning little or no additional profit from their investment in this refinery expansion. Possibly even resulting in a decrease in profit.

Blowhard politicians and ignorant citizens fell for the tales of environmental disaster due to this de minimis increase in refinery discharges. BP gains in public opinion for stopping the refinery expansion and can also count on increasing profits. What a no-brainer.
  • Winners: BP, politicians, environmental activists
  • Losers: Consumers
  • Bystanders: Lake Michigan - no change to the lake, either way
I'll take it a step further, it isn't environmentalists and politicians that have prevented expansion of oil refining capacity in the U.S. since the 1970's. It is oil companies that have made this decision based on sound economic reasoning. With this supply-demand curve, increasing capacity means decreasing profit.

1 comment:

Dad29 said...