atomic_fungus (atomic_fungus) wrote,
atomic_fungus
atomic_fungus

#397: As predictable as the tides.

Democrats slam oil companies again.

Gasoline is over $3 per gallon again; as we get closer to summer driving season, demand for gasoline increases just as EPA mandates force oil companies to make 60 different blends of fuel. Total refinery capacity decreases due to required retrofits to make these blends, and since demand increases while supply decreases, the price per unit goes up.

This is basic macroeconomics.
"It's outrageous ...Isn't it interesting every year about this time, a refinery goes down for repairs," said Senate Democratic Leader Harry Reid of Nevada.

"Is that coincidental? Or is it part of a plan that these multinational, huge companies who are making obscene profits in the tens of billions of dollars -- is this part of their game to keep the profits going?" Reid said.

House Speaker Nancy Pelosi on Tuesday announced seven congressional hearings in coming weeks on soaring energy prices and plans to put together a proposed package of energy bills by July 4 to address the issue.

"With Memorial Day travel and the start of summer driving only a few weeks away, drivers are paying a heavy price for the Bush administration's failure to enact a comprehensive energy strategy," said Pelosi.
Of course, none of this has anything to do with Democrats trying to make political hay from a situation they are largely responsible for creating. No. Shame on me for even thinking such a thing.

Well, isn't it interesting every year about this time, farmers plant crops? Is that coincidental? Or is it part of a plan? Is this part of their game to keep the profits going?

The Democrats spooge over "obscene profits" because they can't function without someone to demonize, be it Republicans, oil companies, SUV owners, or what-have-you. Because the average US citizen doesn't understand the economics of energy production and supply, and because that very same average US citizen earns around $30,000 per year, it is very easy for Democrats to get their votes; all they have to do is hit the right chords. "Big Oil" is a classic demon for them to pursue, not only for "obscene profits" but pollution and other evils.

The common riff among the rank-and-file is that since gasoline is a "necessity", the companies which make the stuff don't have a right to "obscene profits" (regardless of the source).

If you try to point out the flaw in that argument, expect a blank stare and something like, "I just can't make any sense out of that." I did, once. I gave examples of things everyone needs and explained why it's not a crime to make a profit on them, but all I got in response to my argument was a lame, "Well, I just can't understand that."

People see the high price of gasoline and automatically assume that all the costs of producing it remain fixed. Democrats play on this misconception, allowing people to think that all of the price increase is pure profit, when the opposite is true. A typical oil company sees around $0.10 profit on each gallon of gasoline, whether the price is $1.92 or $3.65:



This image is from 2006, but the principles apply, and if you look carefully at the red bars--indicating refining costs--you will see the cyclical nature of refining costs. See how, in the winter months, the refining costs are lower than they are in summer months? This is not a "coincidence"--but it is emphatically not because oil companies are deliberately trying to drive up their prices. (Also, look at how huge those red bars were after Katrina and Rita shut down the refineries in New Orleans and parts of Texas. This is also not a "coincidence".)

EPA mandates for "high oxygen" fuels make refinery capacity more scarce, and at the same time they increase demand for refinery capacity. All of this occurs at a time when overall demand for fuel increases, putting further upward pressure on demand for refinery capacity.

All of this occurs in a situation where refining capacity is already being fully utilized: as I've said approximately 40,000 times, demand for fuel in the US requires running our refineries at 98% of capacity every day of every year. And guess what?

An oil refinery is a big machine. Like all machines, it contains moving parts that break. Maintenance must be performed and broken parts must be replaced. All of this takes time; and because of EPA fuel mandates, refineries must be run beyond their maximum capacity. It may mean running a refinery at 150% of capacity for three weeks, shutting down, refitting, running it for another three weeks at 120%--and continuing this process throughout the summer months. (The refit periods can also be used for maintenance, of course.) The plant utilization must average out to 98% of maximum, or else the plant is not carrying its weight.

I should explain here that "maximum capacity" is a figure assigned by the engineers who design the machines. These figures are derived by figuring cost of maintenance, longevity of the equipment, and the durability of the parts. It is possible to run the machine at a higher output than the rated capacity, at the expense of replacing more parts, performing maintenance more often, and reducing the overall lifespan of the equipment.

For example, if you drive carefully, never race, and do all your oil changes on time, your car should last a very long time. If you beat the everloving piss out of the car and drive like a maniac, the car will wear out much more quickly.

Let's go back to our car analogy. Like cars, refineries get old, wear out, and become too expensive to maintain. They become like the old pickup sitting in the weeds behind the barn; something major goes wrong (or there is a fire or explosion) and the company decides it's time to get rid of it. In other cases, the refinery just pollutes too much (the old Honda fails its emissions test) and can't be economically rebuilt to pollute less. In any event, the refinery is shut down and dismantled. But this is another opportunity for Democrats to complain about oil companies: "They've shut down many refineries on purpose!"

No new oil refineries have been built in the US since the 1970s, yet demand for fuel has increased manyfold since then. Oil companies have managed to do a yeoman's job of satisfying demand without building new refineries, which the EPA, environmentalists, and the NIMBY crowd have just about made impossible.

Even the best juggler, however, cannot keep all the balls in the air forever.

Demand for fuel is increasing, and the machines that make the fuel are wearing out. Sooner or later, if nothing else changes, demand will increase beyond the possible supply.

Democrats screaming about "obscene profits" aren't going to fix that problem. In fact, they're causing it.
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