Where those oil profits go
The current oil shortage hurts almost all US businesses, but it certainly does not hurt the oil companies. Major price hikes, caused by real shortages, make it easy for the oil companies to shave a few more pennies out of each tankful sold. That’s enough to add a nice plus to their profits, but not so much as to trigger public outrage -- yet. Even if they take the same percentage as a markup form their costs, that’s a nice plus when gas prices get high.
The classic market perception would be that higher prices would stimulate more exploration, bringing online new resources that perhaps cost-justifiable before. But that would be wrong, at least so far.
Take the recent case of ChevronTexaco buying Unocal. ChevronTexaco invested its added profits into the oil business, but only by buying up exsiting operations, not by digging new wells or upgrading oil recovery from existing sources. We expect that cash-rich oil companies will follow suit.
That’s what just happened at another level of the market. Valero Energy is the US’s leading independent oil refinery company, that is not one of the big global, vertical oil companies that do everything from owns wells to pumping gas. Valero announced it had agreed to buy out rival independent Premcor. The deal, valued at $8.7 billion, would put Valero ahead of all US oil refiners with a 13% share, including the big oil giants like ExxonMobil and ChevronTexaco.
According to a Wall Street Journal article, (“Valero Energy To Buy Premcor”, 4/25/2004)
The deal is the latest in a wave of mergers that has hit refining in the past five years and helped it evolve from a rocky business once plagued by excess capacity into a highly profitable industry. It also comes at a time of high gasoline prices that have begun to stir a backlash from consumers and legislators.
According to the article, the top five players (including Mobil Exxon and ConocoPhillips) now control over 50% of the oil refining market. Valero’s rise into the big boys’ club has been nothing short of phenomenal. It owned only one refinery in 1997, and will have 19 when the deal is done. The company has made a number of acquisitions, most notably Diamond Shamrock in 2001, a $6.1 billion deal.
The refinery industry in the US, long unprofitable because of overcapacity, has declined from over 300 refinery sites in 1981 to under 200 now. The WSJ article notes that the "last new plant to be built in the U.S. was in 1976.” That reduction in competition has driven up profits for the remaining companies. While Valero has spent money on upgrading its exiting plants, much more of its added net income has gone into grabbing market share. The Premcor deal tightens the market even further.
8:30:52 PM 
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