Refining Sector Boosts Profits By Closing Plants

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By Ida Tarbell

The official justification for the 1981 deregulation of the U.S. refining sector was that the greater good would be better served by increasing competition, which would provide consumers with lower prices and encourage energy companies to embrace innovative technology more quickly. Well, that’s not happening right now.

In fact, a recent article by the Dow Jones News Service suggests that refiners are becoming more profitable this year by closing refineries and producing less gasoline as they face oil prices being pushed ever higher by speculators. That strategy made gasoline more expensive this winter – a time of seasonally-weak demand – even as U.S. motorists were using less and less. It worked so well that the energy sector intends to curtail supply even further this summer – a time of seasonally-strong demand ­– by closing the nation’s 10th largest refinery.

Once that happens, at least half the refining capacity that existed on the East Coast in 2011 will be shuttered, creating an environment for massive scarcities and price hikes.

The greater good isn’t even a consideration in this development, which is being driven solely by the relentless quest for profit growth.

The idea isn’t to make life for the faltering middle class as miserable as possible. That’s just a little tangential benefit for class-warfare minded investors like the infamous Koch Brothers. The real idea is to boost profit growth and the concentration of societal wealth by any means necessary. Fair and unfair. Moral and immoral. Patriotic and unpatriotic.

What can U.S. consumers do about it?

Not a damn thing.

You need to stop thinking of yourself as people and start seeing yourselves as numbers on a stock report. Because that’s all you are to your fellow Americans on Wall Street.

And you need to stop thinking of your elected officials as leaders and start seeing them for the political hookers they are. How do you think 49% of Congress got to be millionaires? High moral standards?

Come on.

Most of your elected representatives have already been bought and paid for by the energy industry. They don’t actually work for you. They just have to pretend to work for you when they’re up for election. Those who are best at misleading you get a job in Washington, D.C.

Fortunately for them and for the energy industry, you’re easily fooled into thinking you have taxation with representation, but have you ever actually tried to speak directly with one of your so-called “representatives” at the state or federal level? Good luck getting through. I can guarantee you they pick up the phone for the big energy lobbyists they work for. Hell, they chase after them as shamelessly and relentlessly as crackheads looking to buy another rock.

You, not so much.

The painful truth is that domestic demand for gasoline is waning, but gasoline prices are out of sight. Instead of producing a stable and reliable supply of gasoline more efficiently for their fellow Americans, most U.S. energy companies are now players in a global market which places profit growth ahead of everything and everyone else, including national loyalty.

We’re no longer even discussing the merits of profit versus loss, but stable profit vs profit growth. In short, the ludicrous idea that profit should always expand, even in the worst economic climate for the poor and faltering middle class since the Great Depression.

There are 12 million Americans who are categorized as unemployed right now and at least another 35 million others of working age who aren’t even considered part of the civilian labor force anymore. If the U.S. was really a free market, instead of a corporate plantation, all those jobless people would result in lower gasoline prices.

The only way the energy sector can justify further price hikes is to keep cutting supply to amplify the value of the remaining gasoline available for domestic consumption by creating a false scarcity. And that’s exactly what it’s been doing since it was deregulated.

On a per-capita basis, refining capacity per American is now 47% lower than it was in 1981 because our population has grown by about 87 million people the past 31 years to its present 314 million. Meanwhile, U.S. refining capacity has reached a seven-year-low and and is poised to dip even further in the short-term.

Since September, ConocoPhillips has closed its plant in Trainor, Pa., which had the ability to process 185,000 barrels of oil per day (bpd) and Sunoco has closed its refinery in Marcus Hook, Pa., which had a capacity of 178,000 bpd. Crude oil is refined into gasoline and other petroleum products, such as propane.

In July, Sunoco plans to shut its huge Philadelphia refinery, which can process 335,000 bpd and is the 10th largest of the 140 plants that still transform oil into gasoline in this nation.

The three Pennsylvania refineries accounted for about half of all East Coast refining capacity in 2011. The region is also served by gasoline pipelines – such as the Colonial Pipeline, which carries about 2.4 million barrels of fuel daily from Gulf Coast refineries.

So, it’s not a simple straight-up matter of having local refineries. But they sure help.

Without these three plants the East Coast becomes more dependent on Gulf Coast refineries, which magnifies the havoc future Hurricane Katrinas can wreak on our national energy grid.

“Right now, the overall stock situation in the U.S. doesn’t seem catastrophic, but when the Sunoco refinery goes down, it will be difficult to meet demand,” Olivier Jakob, managing director of the Swiss consultancy Petromatrix told Hydrocarbon Processing.

Sunoco reported a pre-tax loss to shareholders of $660 million for the fourth quarter of 2011, with $630 million of that amount being associated with its ongoing exit from the refining business. The company announced its departure plans in December of 2010, largely because its refineries are overly dependent on so-called “light and sweet” grades of oil that are easy to move through pipelines and refine into gasoline, but more costly to purchase. They’re also the standard for the international pyramid scheme known as “oil futures trading.”

Meanwhile, Houston-based ConocoPhillips had profit growth of 66% in the fourth quarter of 2011, with net income of $3.39 billion. It plans to idle some natural gas wells, too, until prices rise from $3 per million British thermal units to $5 or $6, Chief Financial Officer Jeff Sheets told Bloomberg.

It’s not that ConocoPhillips isn’t seeing incredible profit growth. It’s just that too much is never enough for investors. Hence the need to stop producing some natural gas until the resulting shortfall pushes prices back up.

God forbid energy should ever be more affordable for the average American.

Affordable energy would suggest the U.S. is a society that looks after its own, instead of an economic plantation that enslaves the poor and middle class. We typically leave that kind of grubby do-gooder stuff to Social Democrats in Scandinavia, except when it’s time for members of the faltering middle class to get shot in Iraq protecting our communal energy interests.

Then and only then, the U.S. is miraculously transformed back into a real society again, in which citizens are expected to make sacrifices for the greater good. Just don’t look for that kind of patriotism and self sacrifice from today’s mercenary CEOs and the predatory hedge funds that root them on to new personal lows.

Sadly, advancing the greater good is simply a luxury most chief executive officers cannot afford as they try to fulfill their legal obligation to maximize shareholder value – aka boost profit growth. Investors relish that ability.

ConocoPhillips CEO Jim Mulva is popular with hedge funds. Thirty-nine of them had $3.4 billion invested in the company as of March 12, according to the Seeking Alpha financial website.

“We took some pretty difficult decisions, saying we’re going to exit certain projects or get out or sell certain assets so as to improve returns on the portfolio,” Mulva explained to investors on March 5. “This company is going to have less refining going forward.”

There was no mention of the impact to society during that earning call. It just never came up.

The U.S. is the world’s largest gasoline consumer and refiner. The U.S. energy sector also is the leading donor of legalized bribes to our pay-to-play system of government and has a history of boosting profits by creating false scarcities and de facto monopolies.

U.S. energy companies typically support Republican candidates and policies. The energy and natural resources industry has donated $606 million in legalized bribes to elected officials since 1990, with 70% going to Republicans, according to the opensecrets.org website.

It’s hard to believe they’re spending all that bribe money for nothing. Here’s a thought: what if our energy leaders are actually superb but immoral businessmen who think everything and everyone is for sale? What would they want in return from  the political hookers they purchase?

Federal subsidies? Check. They’ve got that.

What about a docile workforce concentrated in right-to-work states like Texas? Check.

How about the benefits of national affiliation – aka military support when their international interests are threatened – without the burden of advancing the greater good of the middle class Americans being wounded and killed? Check.

How about the monopolistic ability to manipulate prices by creating false scarcities? Check.

What about the ability to advance their interests ahead of the greater good? Bingo.

In one recent example of proven energy market manipulation, Houston-based Enron Corp. and other energy companies enriched themselves by creating a fake energy crisis in California in 2000 and 2001. The faux crisis destroyed thousands of jobs, stressed families and prompted an exodus of business facilities to locations with stable energy prices and power grids.

And what did Wall Street think of Ken Lay – the chief executive officer of Enron when all this was going on? They loved him.

The U.S. enegy sector has a long history of market manipulation.

Former president Theodore Roosevelt and the U.S. Supreme Court broke up Standard Oil into 34 companies in 1911 for sustaining a monopoly and restraining interstate commerce. Some of its Atlantic operations were purchased by Sunoco. One of the 34 pieces is now known as ConocoPhillips.

Congressional Republicans continue to stymie President Barack Obama’s efforts to eliminate $24 billion in energy industry tax breaks. Even more amazingly, they continue to convince the faltering middle class that gasoline and oil prices are dictated by supply and demand in a free market, and that national energy security is advanced by using up our remaining domestic reserves of fossil fuel faster so they can be sold on the global market to the highest bidder.

They think we’re that stupid.

Correction, they know we’re that stupid.

Why?

Because the faltering middle class has been that collectively stupid for decades.

We’ve turned a blind eye to the pyramid scheme on Wall Street, in which speculators routinely gin up the price of oil futures.

Let’s pretend you’re a Saudi Prince with billions of dollars of personal wealth coming in each year from oil sales. What would be the best way to put that money to work? Would you:

a) Buy oil futures on Wall Street to drive up the price you receive for your oil?
b) Buy oil futures on Wall Street to drive up the price you receive for your oil?
c) Buy oil futures on Wall Street to drive up the price you receive for your oil?

As you can see, it’s really complicated.

We’ve also turned a blind eye to the huge tax breaks we continue to extend to multinational energy companies with no loyalty to anyone but their own investors.

Just because we’re that dumb doesn’t mean those companies have to be dumb enough to reward us. Look at it from their perspective: they’re already shelling out millions in legalized bribes to buy cover from our political hookers. They’re got to offset that expenditure someplace.

The U.S. refining sector has experienced considerable consolidation since 1981, when government price controls and allocations were removed at the request of energy lobbyists and their political hookers in Washington, D.C. The deregulation effort led to the closure of many smaller refineries.

The number of operable refineries in the U.S. has plummeted to 140 from 324 since 1981, when the sector provided a national population of 227 million with 18.6 million bpd of refining capacity. Today, U.S. refiners serve a population of 314 million with the capacity to process 17.3 million barrels of oil per day into gasoline. That works out to a 47% decline in the amount of refining capacity per American.

The idea at the time was that all those those smaller refineries were inefficient and the greater good would be better served by letting the energy market guide industry growth. That was before the Internet, the implosion of the Soviet Union, the rise of a more global economy, and the wholesale takeover of the U.S. political system by wealthy individuals and industries.

Now, the relentless and mindless quest for profit growth has virtually eclipsed the notion of public service among U.S. business leaders. Which means that if the U.S. refining sector cannot pass along the higher cost of oil to all motorists it will simply price some of them out of the market completely, serving only those who can help it support profit growth.  Even if that means exporting gasoline refined in U.S. plants from U.S. oil to affluent buyers overseas.

In short, the greater good be damned.

One European trader suggests things could get really “nasty” in the U.S. this summer if the scarcity created on the East Coast by the three refinery closings in Pennsylvania is coupled with the normal seasonal increase in demand and a damaging hurricane season that closes some Gulf Coast refineries.

It’s a great way for the energy sector to convince American voters that Obama is incapable of protecting them from its predatory ways just ahead of the November election, and a nifty payback for his decision to stall the Keystone Pipeline extension they need to carry cheap oil to Gulf refineries from the Candian Tar Sands production basin.

In the longer term, the refining sector seems poised to consolidate operations in the Gulf in anticipation of the Keystone’s completion. The cheaper Canadian oil is hard to refine and magnifies the financial advantages of the Gulf’s complex refineries.

The research firm of Wood Mackenzie Ltd. is predicting that U.S. refiners will increase their gasoline exports to 889,000 barrels a day by 2015 from 439,000 in 2011, in response to waning domestic demand.

All if which brings us back to the same over-arching question: if domestic demand is waning why do prices continue to surge?

In a free market, prices are supposed to fall when demand weakens and supply expands. Unless a monopolistic industry is able to short-circuit that relationship.

All of which raises another difficult question: what’s the point of all these energy conservation efforts again?