to imagine how much money was made inside their perimeters.
Nobody had built a major new oil refinery in the United States since 1977. In that year, when Jimmy Carter was president, a new refinery in Garyville, Louisiana, went into production. This marked the last time a major new competitor entered the refining market.
The primary obstacle to building a new refinery was the Clean Air Act, which required new facilities to comply with pollution standards that existing refineries were allowed to avoid. As outlined earlier, the existing refineries exploited a provision of the Clean Air Act called the New Source Review, which allowed them to expand their old refineries in ways that skirted the onerous pollution controls applied to new refineries. The Department of Justice came close to charging the refineries with violating the Clean Air Act but instead allowed them to stay in business with more stringent controls. The legacy refineries, including Koch’s, have operated under that consent decree ever since. While the consent decree might have helped curb pollution, it did nothing to foster competition in the refinery business. The Clean Air Act froze the game board of refining competition, leaving only the incumbent players in place. They were left to divvy up the business among themselves.
During the 1980s, ownership of the nation’s refineries consolidated into fewer and fewer hands. After the Reagan administration loosened antitrust enforcement, a wave of mergers swept through the industry. The mergers accelerated during the Clinton administration. Between 1991 and 2000, there were 338 mergers among oil refiners. The consolidation continued through the Bush administration.
In 2002, there were 158 refineries in the United States. By 2012, there were only 115 producing fuel.II From administration to administration, Democratic to Republican, it seemed like the federal government did all it could to ensure that no new refineries entered the market. A company called Arizona Clean Fuels attempted to build a multibillion-dollar refinery, starting in 1998, to help ease tight supplies in the Southwest. The project was hindered by years of permit disputes. Even by 2009, the company was still promising to break ground. In 2011, the project seemed dead, but it was revived. By 2018, there was talk that the refinery might be built, but regulatory hurdles still remained.
Fewer and fewer companies refined oil, and they did it at larger and larger facilities. Even without new refineries, US refining capacity increased between 2002 and 2012 from 16.5 million barrels a day to 18 million barrels a day.
While the refiners were processing more oil, however, there was evidence that they increased production just enough to keep up with rising demand, and no more. There was no incentive to increase capacity to the point where it might bring gasoline prices lower.
By 2004, the refining industry was already “imperfectly competitive,” according to a report from the US Government Accountability Office. The report found that refiners had tremendous market power and that “refiners essentially control gasoline sales at the wholesale level.” The GAO investigation found that the consolidation made gasoline more expensive for consumers. The increased market concentration “generally led to higher prices for conventional gasoline and for boutique fuels,” the report concluded.
By the time the Eagle Ford tsunami arrived, US oil refineries were running full tilt, processing just enough oil to keep up with demand for gasoline. By 2016, US refineries ran at an average of 90 percent of their total capacity, compared to the global average of 83 percent. Only India ran its oil refineries at a tighter capacity. There was simply no excess capacity in the system, and no new companies willing to enter the business and pick up the slack.
The bottleneck was severe. By 2015, even ordinary refinery outages caused catastrophic price increases for gasoline. That summer, BP partially shut down its refinery in Whiting, Indiana, to repair a set of leaky pipes. The closure caused gasoline prices in Chicago to spike by 60 cents a gallon, while gasoline prices rose throughout the surrounding region. It was the biggest such price hike since Hurricane Katrina decimated the Gulf Coast in 2005. Capacity was so tight that even routine repairs had hurricane-like effects.
In this environment, the profitability of US refiners was breathtaking. In 2010, the average profit margin to refine a barrel of crude oil in the United States was roughly $6 a barrel, by far the highest in the world. The next-highest profit margin was in Europe, where it was about $4 a barrel. One year later, US refining profit margins had swelled to over $16