Even against the zany backdrop of a presidential election year, a federal antitrust investigation into the planned closure of a refinery seems bizarre.
What would the Federal Trade Commission do if it somehow determined that next October's shutdown by Shell Oil Products US of its 70,000 b/d refinery in Bakersfield, Calif., actually violated antitrust statutes? Would it really declare martial law on American business by forcing the company to continue operation of an unprofitable asset?
The investigation looks like a sop to Sens. Dianne Feinstein (D-Calif.) and Ron Wyden (D-Ore.), who allege that the closure will raise West Coast gasoline prices. Indeed, it might do that—slightly and for a while, anyway. It also might improve efficiency of the region's refining and distribution system and push fuel prices in the other direction.
Protests inconsistent
Protests against shutdown of a refinery in California are wildly inconsistent. When the state adopted the country's strictest specifications for motor gasoline, precious few West Coast politicians worried about the effects on refining capacity. More recently, Feinstein, Wyden, and most of their fellow Democrats have shown little such concern while resisting every Bush administration effort to repair damage from the regulatory bombs its predecessor dropped on the refining industry. And FTC didn't utter an antitrust peep when, by its own count, 27 US refineries ceased operation during 1995-2002—four of them in California.
The protests also fail to recognize that refineries operate at the pleasure of shareholders, not governments. They generate profits on invested capital or quit business.
Until recently, generating profits in the refining business was chronically difficult. Part of the reason was an overabundance of distillation capacity—much of it old, inefficient, and poorly located—relative to demand. Another reason, this one continuing, is a regulatory burden that raises operating costs and requires heavy outlays of capital. Market pressures made refinery closures inevitable, even necessary. Regulatory pressures amplify the effect.
Shell hasn't blamed regulation for its Bakersfield decision, citing instead declining production of San Joaquin Valley heavy crude. But the regulatory costs plaguing all refiners surely raised economic thresholds against which it assessed Bakersfield's future profitability.
Controversy over Shell's decision has degenerated into ridiculous second-guessing. Pointing to irrelevant data on San Joaquin basin drilling and reserves, Wyden challenges the assertion that production of Bakersfield's heavy feedstock is declining, which it most evidently is. A pressure group in California cites cycles of stout refining margins at Bakersfield to contest Shell's assessment of overall profitability. And, of course, protestors produce scraps that they suppose attests to the overarching suspicion in all this: that Shell is closing the refinery in order to elevate gasoline prices.
To observers who think this way, conspiracy is obvious: Shell shuts down a refinery that, contrary to company pronouncements, is profitable, aiming to short the Californian gasoline market by 2% so its other refineries in the area can profit from the consequent price hike. Clever, those conspiracy theorists.
But this conspiracy theory, like so many, ignores much. Gasoline prices would have to rise astronomically to compensate Shell not only for the $200 million charge it took in last year's fourth quarter for the Bakersfield closure but also for the forgone gasoline sales. Prices won't rise nearly that much if they rise at all. What's more, if operations at Bakersfield could be sustained profitably, as Shell's detractors insist, halting them while margins are high is the last thing a rational company would do.
Ownership concern
The FTC's concern might have more to do with ownership of the Bakersfield refinery than with suspicions of price manipulation. Shell became sole owner in 2001, when Chevron Corp. merged with Texaco Inc. To satisfy FTC antitrust stipulations, Texaco had to withdraw from Equilon Enterprises LLC, a refining alliance with Shell that owned the Bakersfield refinery. FTC might now see some reason for concern about closure of a refinery divested to allow a merger.
In a summer when gasoline prices are high and elections loom, however, legal technicalities of past mergers and theories about market concentration aren't likely to receive much popular attention. Whatever its motive, the investigation inflames ludicrous suspicions about the gasoline market and encourages political intrusions certain to harm the consumers FTC is supposed to help.