California: A case study on overbuilding capacity

An ideal case study on the refining industry's compulsion to overbuild can be gleaned from the CARB (California Air Resources Board) gasoline saga of the early 1990s. All of the major drivers of overbuilding played a hand (see related story, p. 17): from incremental-barrel economics to overly optimistic margin forecasts; from dreams of future inadequate supply to the fear of being left out and losing control. Background When California authorities mandated a new formulation for gasoline, they started a free-for-all in the refining industry. Forecasts predicted that refiners would not be able to afford the investments necessary to fund plant upgrades, leaving the s...

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