The question, then, is what has driven refinery capacity down, and therefore profit margins and gas prices up?
The multifaceted story involves inaccurate predictions of demand, extreme weather events, disinvestment in new capacity, and yes, refineries taken offline in Russia during the war. But the ongoing story in refineries, according to Diana Moss of the American Antitrust Institute, is one of rampant consolidation.
“There has been a dramatic loss of numbers in physical refineries since the early 1980s,” Moss explained, pointing to Energy Information Administration statistics. Operable refineries narrowed from 301 in 1982 to 129 in 2021, and the reductions were even more pronounced in the diesel heating oil–reliant Northeast, with a 74 percent reduction over the same time frame. An Oil & Gas Journal article from 2015 demonstrates 20 years of consolidation, from 26 major refinery players to 11. In California, two firms control half the refinery capacity.
As these consolidations occurred, not a single major new refinery was built between 1977 and 2020. Nor did the Federal Trade Commission, which had jurisdiction over refinery mergers, act to stop many of them. “The FTC is very fond, as they are in pharma mergers, of approving deals with consent orders where they take divestitures,” said Moss. “We have a rapidly expanding record of failed divestitures. We’re trying to encourage the agencies not to settle these cases.”
Moss sees some of these shutdowns as more than a coincidence. “The most direct and effective exercise of market power is to take a plant out of service,” she said. “And it’s not illegal under the antitrust laws to restrict output and jack up the price.” But it’s very difficult to distinguish between accidents and business decisions. “It’s easy for a company to say, ‘We’re not intentionally restricting output, we have this glitch,’” Borenstein said.
But the situation does reveal a general inattention to the important role of middlemen in the economy. With gas prices, “everyone goes immediately to the top of the supply chain, at the crude oil level,” said Moss, “or they go to the pump. Nobody looks in the middle of the supply chain for mischief and bad conduct. It’s a problem in energy and health care and food and agriculture. The middle of the supply chain is strategically a place to exercise market power.”