Are refiners holding out?

Robert Rapier does gas prices, this time investigating the long-term price pressures. His analysis of the theory that refineries are holding back gas to hold up prices provides a thorough debunking (and explains why OPEC countries often exceed their quotas).

Say that you operate a 200,000 barrel a day refinery. Margins are quite good right now - let's say in your area they are $20 a barrel. So, when the refinery is running normally, you are grossing $4 million a day. Would it make good business sense to cut your capacity in half - to 100,000 barrels a day? While such action would probably cause the overall price of gasoline to rise, it is going to have a disproportionate effect on your refinery. If margins go up to $30 a barrel (although there is no way taking 100,000 barrels off the market would impact margins to that degree), you are still $1 million a day worse of than you were. You have given up $365 million a year in order to reduce your capacity. You would have made an incredibly stupid business decision. In fact, you would be much better off if you could boost capacity by 100,000 barrels a day. Sure, prices might slightly drop, but your overall profits will be higher, especially in such a tight market.

Furthermore, you don't know if Shell down the street might be able to make up the production shortfall, pocketing the money that would have been made by your refinery. (Contrary to popular opinion, oil companies do not consult each other on such issues). You also don't know if exporters from Europe will respond. If they respond by boosting exports to the U.S., now they are pocketing the money that your refinery is losing. In summary, this is not a rational way to conduct business - unless your margins are negative. You would be making a decision that will certainly cut the returns at your refinery, while not knowing how your competitors will respond to the supply shortfall.

If we'd had the political will to increase gas taxes when prices were low, we'd be in a lot better shape right now, as gasoline demand would have been restrained by higher prices. Not to mention, we'd have more money for transit and highway maintenance.