Michael and Paul,

    The most plausible explanation that I have read for the lack of refinery expansion is this:  The majors expect continued "high" crude prices -- though not so high as now.  As a result they expect slower long-term growth in demand for product.  Thus building new refineries would add capacity just when demand growth is slowing.   Better to have high margins rather than lower ones -- so, don't add capacity.

Gene Coyle

paul phillips wrote:
Michael,
I don't know that this is necessarily in conflict with the refinery question.  Why are they not investing in exploration (though you would have few supporters for that contention in Alberta these days)?  Do they think that oil prices are only a bubble and will fall precipitously and undermine the profitability of exploration today?  Or do they  think that  there are few promising areas for exploration which are not already being explored or developed which is the contention of the peak oil people?
     I find Soula's explanation for the non-investment in refineries non-convincing in light of the reports going back to last year that the run-up in prices at the pump were not due to the shortage of crude but rather to the shortage of refinery capacity.  Also, complaints here in Canada from gas retailers about the low margins at the retail end make me question about the contention that the companies are taking their profits only from the the production and retail distribution ends. If there is a shortage at the refinery stage, why would it not be profitable for an independent (or one of the majors) to build a refinery to meet this unfilled demand. On the other hand, if the  majors think that, even if capacity is strained at the moment, building new capacity would only create excess capacity and result in a price war (given the very high fixed cost (and marginal addition to supply) and low variable cost in refining), there is little or no inducement to invest if they think there will be no equivalent increase in supplies of crude.

Paul P

Michael Perelman wrote:
Paul, they are not investing in exploration.  They look for oil on Wall
Street.


On Sun, May 07, 2006 at 05:44:02PM -0700, paul phillips wrote:
  
I have read in several places that the oil companies are not investing
in new refineries, which is the bottleneck for domestic gasoline supply,
because (pax Jim) of peak oil, that they can not get the increasing
amounts of crude necessary to justify new refinery capacity.

Paul P
    

--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael at ecst.csuchico.edu


  

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