Why I'm not voting democrat in 2008...

[lord of the mark]

yah know, its not absolutely IMPOSSIBLE for a group of companies in a capital intensive industry (such as oil refining, which is where the capacity constraints are that are impacting the current price of gasoline) to have certain unspoken understandings about reluctance to invest in new facilities. I mean its not like having an investigation of the industry structure and competitive behavior is manifestly absurd. And yes, if IT were to be the case that they were engaging in anticompetive behavior, the profits that would proceed therefrom WOULD, in some sense, be a waste.

[MRT144]

Originally posted by Ogie Oglethorpe
You'll find oil companies are one of the MOST conservative industries for investment. Talk about slow and plodding in contrast to other industries. Very low risk takers.

i meant the individuals who decry oil companies. why not get your voice in there with other shareholders and benefit when they benefit?

[Ogie Oglethorpe]

Gotcha. My bad.

[Last Conformist]

Originally posted by VJ

Well, Ludd does want us to live like we did before "we moved out of the caves", so at least he's consistent.

I only wish he'd try and lead us there by example.

[MichaeltheGreat]

Originally posted by lord of the mark
yah know, its not absolutely IMPOSSIBLE for a group of companies in a capital intensive industry (such as oil refining, which is where the capacity constraints are that are impacting the current price of gasoline) to have certain unspoken understandings about reluctance to invest in new facilities. I mean its not like having an investigation of the industry structure and competitive behavior is manifestly absurd. And yes, if IT were to be the case that they were engaging in anticompetive behavior, the profits that would proceed therefrom WOULD, in some sense, be a waste.

About a decade ago, when a certain (unnamed, but obvious to anyone knowing the region/industry) refiner came into being by some spinoff acquisitions, I was involved in some of the financial analyses related to some of their transactions. It was pretty eye-opening stuff.

There's no need for any sort of collusion (unspoken or otherwise) if economic conditions work equally against any possible participant.

Smaller scale refineries just don't have anything close to the economy of scale of large refineries.

Assuming you're in the oil business, or otherwise have the related experience, financial capability, etc., there's only a few problems:

It's almost impossible to find a refinery site that works - forget environmental issues for a moment (which are huge, if you've ever spent time around Richmond, CA, or the Alameda corridor in LA, or other large-market refinery sites, nobody wants to be downwind or near one of these ugly bastards).

Simply finding the physical space for both refinery and storage/transfer operations, in some location that makes logistical sense (raw materials in, product stored and out, adequate road and electrical infrastructure) would be hugely expensive, and you'd have about a decade before all the permitting, logistics and infrastructure were completed to allow for refinery construction. Somewhere between 500 million and a billion spent to that point.

Then, once you have the refinery in place (another 2-5 years depending on process lines and equipment, plus electrical generation, for a couple billion more, you have to actually run the thing profitably.

Since you're competing against refining capacity with most or all its capital costs already sunk, you're in a world of hurt. If, as expected, your refinery capacity affects supply/demand curves, (in other words, this is additional capacity, not replacing old capacity), you have to contend with the fact that most of your competing refineries have existing mid and long term contracts for their product lines and transport.

So your brand new, beautiful, efficient, cost its weight in gold refinery will also be bearing disproportionate market risk when there are soft demands, and will have to have a higher level of participation in short term and spot markets (shareholders and lenders alike just love the unpredictability of spot markets 15 years in the future when making large capital decisions )

It doesn't matter who you are - your new refinery is non-competitive on the cost side, and has the worst position in the market on the revenue side, and about 12-15 years from starting to spend money to being ready to make a dime, if everything goes well.

You don't need a conspiracy, or even to talk to the other players in the market, to realize that doing nothing is the best course for your own interest, and that adding capacity will damage your interests.

[MRT144]

when does adding capacity ever benefit anyone in the business?

[General Ludd]

Originally posted by VJ

Well, Ludd does want us to live like we did before "we moved out of the caves", so at least he's consistent.

Not really. You can't turn back time. I'm simply anticipating the collapse of our society - a society built upon the rampant exploitation of limited resources with complete disregard to the landbase that supports it. What comes after may resemble the stone age in some ways, but it will certainly not be the same.

I only wish he'd try and lead us there by example.

I was making fire with a bowdrill this afternoon.

[MichaeltheGreat]

Most of the time - as long as the product demand is there, and there's an adequate ratio between the cost of capacity expansion and added sales. Refining oil to gasoline in the present market doesn't meet the latter criteria, but it's an extreme example, not a typical one.

One example right now is US manafacturers of large steam boilers. Capacity constraints are getting to the point where lead times are 24-30 months and climbing, and all that's doing is creating a market entry for Chinese companies (with no prior penetration of the US market) who will guarantee 14 months or less.

I'm working on three different projects where US boilers would be preferred, even with higher costs, but their lead times have taken them out of the market. Four other project I'm going to be starting on within the next six months have the same problem. All told, around 100 million in sales that US manufacturers will lose, just on what I'm working on, and there's lots more where that comes from. Long term, they will permanently lose market share.

[lord of the mark]

MTG

I wasnt saying that absence of new investment proves collusion, and Im aware of some special factors in the refinery biz (though some of those factors are common to other capital intensive businesses). I was simply reacting to the notion that anyone who considered collusion possible must be some goofball populist or socialist.

[MichaeltheGreat]

lotm - they pretty much are goofballs, or else totally ignorant of the relevant markets, to assume collusion (illegal) between companies, when individual self interest arrives at the same result without breaking any laws or leaving trails of evidence.

Some people want to see conspiracies, because there's an enemy to strike at. Much less appetizing than admitting that it's simple market reality, and the level of pain isn't so hight that consumers will react in adequate numbers to affect supply and demand.

Of course, if the loonies were really clever, they'd want a non-profit coop or public sector refinery to tilt the market in favor of consumers, but that would take brains and some depth of understanding of the subject matter, so activists pretty much can go home at that point.

[Arrian]

non-profit coop or public sector refinery

Which would be

non-competitive on the cost side, and has the worst position in the market on the revenue side, and about 12-15 years from starting to spend money to being ready to make a dime, if everything goes well.

right?

No thanks, because if it was government run, it would probably be more expensive (I'm thinking of the Army Corps of Engineers being involved :shudder: ).

-Arrian

[MrFun]

Originally posted by lord of the mark
nowhere in the post are gas price controls called for.

Commenters on political sites are often buffoons.

Well, MRT sometimes does not have the greatest reading comprehension ability.

[MichaeltheGreat]

Originally posted by Arrian
No thanks, because if it was government run, it would probably be more expensive (I'm thinking of the Army Corps of Engineers being involved :shudder: ).

-Arrian

I was thinking more along the lines of utility co-op (which is more functional than a general governmental agency), subcontracting to private sector operators.

I didn't say it was a good* idea, but it's about the only way other than major changes in consumer behavior, to affect the relative market power between producers and consumers.


* Then again, if I get paid to do consulting work on it, it would become a great idea as long as the checks keep rolling in.

[Adam Smith]

Rummaging through my hard drive for the last 5 years or so....

Originally posted by lord of the mark
I mean its not like having an investigation of the industry structure and competitive behavior is manifestly absurd.

True. But I wish the proponents of such an investigation would familiarize themselves with

THIS INVESTIGATION

THIS INVESTIGATION

THIS INVESTIGATION

THIS INVESTIGATION

THIS INVESTIGATION

THIS INVESTIGATION

THIS INVESTIGATION
or even

THIS INVESTIGATION

before calling for YET ANOTHER investigation.

edit: because I can't find the ] key.

[MRT144]

Originally posted by MrFun




Well, MRT sometimes does not have the greatest reading comprehension ability.

Thank you!