As Europe's refiners struggle with processing capacity they don't need, fears grow about emergence of a cartel. The European Community -- not to mention various national governments -- prohibits cartels deemed to conflict with consumer interests. Officials are reported to be watching developments with concern. If refining capacity shrinks, after all, prices of petroleum products might rise.
Indeed they might. Why this should raise consumerist alarm in official Europe is puzzling, however. In their own affairs, European governments show scant regard for the interests of oil users.
The need to trim
The European refining industry seems convinced of the need to trim capacity, which has grown through plant upgrades, environmental measures, and optimistic market projections. The problem, as always when capacity cuts loom, is deciding who makes the sacrifice.
Chronically surplus capacity skews operating incentives. With margins thin or nonexistent, companies try to survive on cash flow and efficiency, hoping competitors will shut plant. That means operating at close to capacity rates, a strategy that dumps product on the market and squeezes margins. By one estimate, European refiners last year made an average of 40,000 b/d more product than local markets needed. And the product surplus is growing.
Accumulating financial losses amount to investments by individual refiners in the assurance that something eventually will give and the hope that it will be a competitor. At some point, some beleaguered company will shut a refinery. If that doesn't do the trick, another refinery will have to go. It can be a long process. Refiners are difficult and expensive to close.
What European refiners have begun to discuss is a more orderly and less costly way to effect the inevitable. Total SA Chairman Thierry Desmarest has discussed a scheme under which refiners willing to sacrifice capacity receive guaranteed, priority access to surviving facilities.
Something like that might work, although conflicting commercial interests and inevitable suspicions about price collusion would complicate the negotiations. As long as refiners acknowledge the suspicions and behave with appropriate caution, however, talking about coordinated capacity reductions -- even implementing them if that proves possible -- need not hurt anyone.
Governments, for their part, must recognize that capacity rationalization is normal business and resist the temptation to pose price gains as the signal to enforce cartel prohibitions. A capacity shakeout, even a coordinated one, is a far cry from cartel behavior. And the whole point of a capacity shakeout is to restore margins, an important factor of which is product price.
Prices might rise
So, yes, product prices might rise if refining capacity shrinks in Europe. But European consumers would hardly notice. On every barrel of oil product they buy, they pay taxes equivalent to two or three times the average per-barrel value of crude oil in international trade (see table, OGJ, Apr. 3, p. 51). And the European Commission wants to extract even more with levies on the carbon content of fuels. From European governments, expressions of concern about consumer interests sound hollow.
Excess capacity presents European refiners with a difficult set of problems. Government resistance to industry rationalization should not be among them. Compared with what governments do to European oil consumers, the price consequence of capacity cuts, coordinated or not, would be slight.
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