Refining a monopoly

shutterstock_73741291All across the country gas prices are rising at record rates to record highs. While this phenomenon has many possible causes, one issue may be the biggest culprit for the current price spike during a normally quiet season. More and more oil companies, which traditionally controlled the entire production chain from oil fields to gas pumps, are now divorcing their drilling and exploration operations from their refinery operations.

Citing the need to appease shareholders with greater profit margins, major oil companies are increasingly shutting down refineries that don’t have easy access to large, new, domestic oil reserves. Refineries are being shuttered in Oklahoma, Ohio, New Jersey, Pennsylvania and Hawaii. These closings can have a devastating impact. Besides the immediate loss of jobs, shutting down or “repurposing” a refinery can lead to higher gas prices, taxing the already strained budgets of everyday Americans, and can increase the need to import fuel.

The recent closing of Hawaii’s largest refinery means that the Aloha State will have to import gasoline, jet fuel and other oil end products from places as far away as India or the Arabian Gulf. If more refineries go dark in the other forty-nine states, then the whole country may become increasingly dependent on not just foreign oil, but foreign gasoline.

Once again, consumers are suffering from the oil companies’ insatiable need for profits. Just like in any monopoly, oil companies are most concerned about profits, not revenues, and have the free rein to increase their take because our ability to curtail gasoline usage is limited.

Worse still is the devastating effect this greed is having on our entire economy: loss of jobs from refinery closings, further job loss and slower job growth due to high gas prices, rising inflation, decreased consumer spending and fuel needs that may outstrip our domestic refining capacity — forcing us to import refined petroleum products. The last point would amplify all of the previous effects by adding to our already large trade and national deficits.

The outlook is not all bleak however. Because the shuttered and soon to be shuttered refineries are large, multi-million dollar complexes, they can be repurposed— a move that could restore jobs lost and contribute to lower gas prices. If more consumers can use replacement fuels instead of gasoline in their cars, then more facilities for producing, storing and distributing the alternative fuels will be needed. Repurposed refineries may be ideal for this, all the while furthering use of alternatives fuels that can compete with oil, hence putting downward pressure on oil prices.

As long as consumers have no alternative to gasoline our economy is prey to such practices. Where consumers can readily switch to replacement fuels such as ethanol, methanol or natural gas, oil companies must offer their product at a competitive price. This would cause them to scramble for whatever revenues they can find, such as revenues from oil refining, to continue financing their operations in the wake of more reasonable profit margins.