A few weeks ago, gas prices shot up very high, near $4 per gallon and even higher on the East Coast. This price rise was attributed to reduced refinery capacity and therefore reduced output, partly due to two East Coast refineries having closed down in the last couple of years. No explanation was offered for why an oil refining business would shut down in a world with increasing anxiety about energy due to international geopolitical strife and concerns about drilling, oil spills etc. Seems like a bad time to exit a business that presumably thrives on volume and market fluctuations, doesn’t it?
Now, we have a similar situation, but on the West Coast. While prices have been declining in the rest of the country over recent weeks, they have actually been rising on the West Coast. Once again, refinery slowdowns and reduced capacity, and therefore reduced output, is to blame.
OK, but why do refineries keep shutting down, or cutting their output? Refineries are in the business of refining crude oil into petroleum and other types of fuel, right? What incentives do refineries have to exit the business, or to cut output? One would think that in any normal world driven by market forces of supply and demand, rising consumer prices is the worst possible time to cut output or exit a line of business. Yet over the last few years, this has become commonplace. Even worse, news stories really avoid asking the bigger questions: why? What is going on in the world of refining crude oil to invert normal market forces?
Here’s an educated guess from me: regulation has driven costs up so high, driving profit margins so low, that the business itself is too risky to continue, at least for some.
I find it very interesting that the media studiously avoids this general topic of the costs of regulation, whether making goods and services more expensive, or constructing barriers to entry and stifling competition, or by making marginal costs of running a business so high that it makes more sense to exit the business than to continue it.