Greater levels of industry concentration can be seen today as a measure of superior economic performance, stronger competitiveness in the global market and increased profitability from economies of scale, according to research recently performed by IBISWorld Analysts Andrea Alegria, Agata Kaczanowska and Lauren Setar. Many analysts acknowledge that the refining industry business model shows higher levels of concentration (and consolidation).Why does this matter? Intense consolidation of refineries in California from a fragmented 30 facilities in 1982 concentrated down to only 11 today provides for more efficiency and production of even higher levels of gasoline production than its predecessors, according to Gordon Schremp, senior fuels analysts at the California Energy Commission. However, the concern is the potential for severe supply disruptions, as previously noted.
Critics of the highly concentrated refinery business model point to California having the highest gasoline prices in the U.S. (close to $4.00 per gallon [$4.00/gal] in Los Angeles as opposed to close to $2.00/gal in Houston) in in spite of equally low crude feedstock costs on both the West Coast and the Gulf Coast. The highly concentrated California refining business has led to the situation where the ExxonMobil Torrance refinery now supplies 1/5 of California’s gasoline, but the facility has only been running at 20% capacity since February 2015, due to damage from an explosion.
This incident at the Torrance refinery has obviously resulted in supply constraints, high gasoline retail prices, lucrative downstream margins (helping ExxonMobil mitigate negative upstream margins), and significantly higher consumer scrutiny. The consumers don’t really care to hear that a highly concentrated refining industry is a natural byproduct of a narrow market. What matters is that they have taken notice of having to pay much higher prices for gasoline compared to other parts of the U.S. Actually, IBISWorld has identified the 10 most concentrated industries in the U.S. and the refining industry doesn’t even make the top ten list, whereas other industries such as tire manufacturing, satellite TV providers and sanitary paper manufacturers make the top ten list, of which none of these industries probably don’t illicit the same level of scrutiny as the refining industry.
According to Robert McCollough, CEO at McCollough Research, he recently explained to the trade press that it is cost-effective for companies in a very concentrated industry model to allow one company to set the price and have everyone else follow along. This may be why consumers and politicians calling out ExxonMobil for high fuel prices place equal blame on Chevron and Tesoro, who together control 55% of the state’s refining capacity. Towards the end of 2014, when crude prices were already showing a significant drop in price from the previous summer, BloombergBusiness pointed out how ExxonMobil Corporation and Chevron Corporation surprised investors and analysts with higher quarterly profits as slumping crude prices made it cheaper to manufacture gasoline, diesel and jet fuel. The results showed the benefit of the highly concentrated refining business model that combined oil fields with refineries to squeeze more value from each barrel. ExxonMobil press releases noted that its refineries made $1 million in profit every two hours during the third quarter of 2014, a 73% increase from a year earlier, to the dismay of consumers on the West Coast.