Are Speculators to Blame for High Gasoline Prices?

Townhall.com ^ | February 23, 2013 | Mike Shedlock

[WhiskeyX]

“The refiners themselves have admitted such:”

No, you have cherrypicked a quotation in a way that takes it out of context and reverses the actual meaning of what was stated in the full statemnt. Readers who go to the article and read it in full can see how the article finds that Valero was able to increase its own margins to avoid the kind of financial losses sustained by its competing refineries which caused them to go bankrupt or shutdown due to the razor-thin profit margins resulting from hyper-competition among refineries. Due to the the interference of Big government and its tax policies, Valero is in a position to profit from the disparate tax accounting treatment of different refining companies. Valero is therefore in a position to survive the low profit margins long enough for the competing refineries to go out of business, so it can then increase its pricing enough to avoid going out of business itself.

Valero will not be able to sustain this situation indefinitely without changing its business model. Valero’s current business model relies upon its opportunities to buy old refineries from the first tier integrated oil companies at pennies on the dollar of what it cost the original owners to construct, maintain, and renovate them.

The major oil companies have been divesting themselves of many of their diversified and integrated operations for the past three decaddes. They’ve been selling their retail marketing divisions, chemicals divisions, transportation systems, and now their downstream refining operations. As their old refineries have become to inefficient and costly to renovate to meet the increasingly stringent demands of the EPA OSHA, and state agencies, the major oil companies have looked for ways of getting these underperforming and perhaps lawsuits losses waiting to happen off of their balance sheets. The Federal windfall profit taxes presented an oportunity for the major oil companies to do just that. Rather than just hand huge sums of money over to the Federal Government in windfall profit taxes, they instead decreased their taxable income by selling the underpreforming refinery assets to other companies at bargain prices and recorded the losses on the sales to reduce their taxable income. In other words, the Federal Government adopted policies which distorted the marketplace in ways which led to the dismantling of the first tier refinery markets.

Companies like Valero and Tesoro were then able to buy up these old refinery assets at a substantial enough discount to justify the investment of enough money to renovate the plants enough to satisfy the latest regulatory requirements, but only for a limited time. These refineries, though renovated by the new investments, are still aged and aging. In the not too distant future, companies such as Valero and Tesoro will have invested in so much capital to renovate and maintain the plant facilities, they too will have to follow the path of their predecessors and sell or shutdown these old refineries. The less profitable or more unprofitable their cracking margins prove to be, the sooner these refineries too will be shutdown.

As the Atlantic Monthly article indicated, Valero is doing what it is supposed to do. It is pricing its product high enough to avoid going out of business. There is no indication its is pricing its products to make windfall profits.

[WhiskeyX]

So, you are advocating Vero to be shamed for making a profit instead of going bankrupt or becoming too unprofitable in the hyper-competitive low refinery pricing to remain in business. Such a lynching of reputations appears no different than the tactics of false propaganda employed by socialists and communists to incite class warfare.