Our Oil Economy

Wednesday, April 11, 2012

An article in Financial Times discusses the plans of an oil company on the East Coast to quit refining oil and, in the process, provides an interesting picture of the American and global oil economies. I found it interesting, for example, that, although Sunoco's move may eliminate half of the refining capacity on the East Coast -- as of 2008, there hadn't been a new refinery built in the United States for over three decades -- the United States is, nevertheless, still a net exporter of refined petroleum products:

US crude production is at its highest in eight years, helping reduce imports. But the US petroleum market is at once global and regional, underscoring how simplistic ideas of energy independence can be in internationally traded commodity markets. The Gulf of Mexico coast, home to 43 per cent of refining capacity and able to consume cheaper crudes, has turned the US into a net exporter of petroleum products for the first time since at least 1949. The inland US, enjoying a surfeit of fresh crude supplies, has been selling discounted petrol into landlocked markets. The west coast is isolated from the rest of the country, while the east coast has historically relied on imported fuel. "The US is really four markets when it comes to products," says Ed Morse, head of commodities research at Citigroup and a former US oil official.
That said, the article should have said something about how government regulation is strangling the oil industry, something the economist Brian Simpson did a few years back, when discussing government-induced seasonal price spikes in gasoline.
Environmentalists are causing higher oil and gasoline prices and, as a result, higher profits for oil companies. The high profits could help solve the problem, but environmentalists are making that harder also. High profits normally cause rapid expansion in an industry, but this is difficult due to environmental restrictions. Compounding the problem, expansion is hard in many foreign locations as well because much oil production is nationalized under anti-capitalist governments, such as those in Venezuela, Russia, and Iran.
The Financial Times piece offers some reasons for Sunoco's difficulty in finding a buyer for its refinery, despite its location in an oil-thirsty part of the country (and the money to be made in refining, as witnessed by expansions in refinery capacity elsewhere), but it says nothing about the role that government regulation may have to play in making the plant more expensive to operate than it should be. Market forces, such as the law of comparative advantage, might well result in oil companies choosing to refine outside the United States, but I have no doubt that these forces are being distorted by central planning.

The workings of the world's semi-free market in petroleum are a wonder. It's too bad that so many of the effects of government restrictions are unseen, and that too many economic reporters don't even mention the restrictions to begin with. The truly amazing story -- of what we could and ought to have -- is going untold.

-- CAV

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