Myths and Facts about Oil Refineries in the United States

Myths and Facts about Oil Refineries in the United States

The Bush administration and some members of Congress blame environmental rules for causing strains on refining capacity, prompting shortages and driving up prices. But in reality, it is uncompetitive actions by a handful of companies with large control over our nation’s gas markets that is directly causing these high prices.

Myth 1: Oil refineries are not being built in the U.S. because environmental regulations, particularly the Clean Air Act, are so bureaucratic and burdensome that refiners cannot get permits.

Fact: Environmental regulations are not preventing new refineries from being built in the U.S. From 1975 to 2000, the U.S. Environmental Protection Agency (EPA) received only one permit request for a new refinery. And in March, EPA approved Arizona Clean Fuels’ application for an air permit for a proposed refinery in Arizona.  In addition, oil companies are regularly applying for – and receiving – permits to modify and expand their existing refineries.[1]

Myth 2: The U.S. oil refinery market is competitive.

Fact: Actually, industry consolidation is limiting competition in oil refining sector. The largest five oil refiners in the United States (ExxonMobil, ConocoPhillips, BP, Valero and Royal Dutch Shell) now control over half (56.3%) of domestic oil refinery capacity; the top ten refiners control 83%. Only ten years ago, these top five oil companies only controlled about one-third (34.5%) of domestic refinery capacity; the top ten controlled 55.6%. This dramatic increase in the control of just the top five companies makes it easier for oil companies to manipulate gasoline supplies by intentionally withholding supplies in order to drive up prices. Indeed, the U.S. Federal Trade Commission (FTC) concluded in March 2001 that oil companies had intentionally withheld supplies of gasoline from the market as a tactic to drive up prices—all as a “profit-maximizing strategy.” A May 2004 U.S. Governmental Accountability Office (GAO) report also found that mergers in the oil industry directly led to higher prices—and this report did not even include the large mergers after the year 2000, such as ChevronTexaco and ConocoPhillips. Yet, just one week after Hurricane Katrina, the FTC approved yet another merger of refinery giants—Valero Energy and Premcor—giving Valero 13% of the national market share.  These actions, while costing consumers billions of dollars in overcharges, have not been challenged by the U.S. government. 

Myth 3: The United States has maxed out its oil refining capability.

Fact: Oil companies have exploited their strong market position to intentionally restrict refining capacity by driving smaller, independent refiners out of business. A congressional investigation uncovered internal memos written by the major oil companies operating in the U.S. discussing their successful strategies to maximize profits by forcing independent refineries out of business, resulting in tighter refinery capacity. From 1995-2002, 97% of the more than 920,000 barrels of oil per day of capacity that have been shut down were owned and operated by smaller, independent refiners. Were this capacity to be in operation today, refiners could use it to better meet today’s reformulated gasoline blend needs.

Profit margins for oil refiners have been at record highs. In 1999, for every gallon of gasoline refined from crude oil, U.S. oil refiners made a profit of 22.8 cents.  By 2004, the profits jumped 80% to 40.8 cents per gallon of gasoline refined. Between 2001 and mid-2005, the combined profits for the biggest five refiners was $228 billion.

Gutting environmental laws for oil refinery siting will not solve the high gas prices. 

So what should be done?

  • Improve regulations over the over-concentrated oil industry

The most effective way to protect consumers is to restore competitive markets. Congress should limit the financial incentives oil companies have to keep gasoline supplies artificially tight by mandating minimum storage of gasoline, reevaluating recent mergers, investigating anticompetitive practices, and re-regulating oil trading.

  • Adopt tougher fuel economy standards
In 2004, the EPA found that the average fuel economy of 2004 vehicles is 20.8 miles per gallon (mpg), compared to 22.1 mpg in 1987—a six percent decline. This decline is attributable to the fact that fuel economy standards have not been meaningfully increased since the 1980s, while sales of fuel inefficient SUVs and pickups have exploded: in 1987, 28% of new vehicles sold were light trucks, compared to 48% in 2004. Billions of gallons of oil could be saved if significant fuel economy increases were mandated. Improving fuel economy standards for passenger vehicles from 27.5 to 40 mpg, and for light trucks (including SUVs and vans) from 20.7 to 27.5 mpg by 2015 would reduce our gasoline consumption by one-third. Dramatic reductions in consumption will not only reduce strain on America’s refinery output, but also on Americans’ pocketbooks.

[1] Committee on Government Reform Hearing, “Potential Energy Crisis in the Winter of 2000” 106th Congress, (Sept. 20-21, 2000).