U.S. Refining

For the U.S. refining industry, the year 1974 marked the end of a post-war boom. The stable crude oil input prices and steadily growing refined product demand that characterized the U.S. refining industry during the late 1940's, and through the 1950's and 1960's, were greatly altered beginning with the Arab Oil Embargo in late 1973. In contrast to the years preceding the Arab Oil Embargo, the experience of the last 20 years has included volatile crude oil prices, wide swings in product demand, changing crude oil input and product specifications, and greater Government intervention. Over the last two decades, the market structure, investment behavior, rate of technological advancement, and the financial performance of petroleum refining in the United States have undergone considerable change.

Although the substantial price hikes attending the Arab Oil Embargo and its aftermath did have the effect of reducing U.S. petroleum consumption, the effect was short-lived. In the United States, petroleum consumption initially fell in 1974 and, as economic recession took hold, declined again in 1975. From 1976 to 1978, however, the volume of refined products supplied to U.S. consumers increased 16 percent,219 reflecting a resumption of economic growth and generally flat or declining petroleum product prices. For example, residential heating oil prices in 1978 (adjusted for inflation) were a mere 1 percent above the 1974 level and the real price of leaded gasoline fell 12 percent during the same period.220 Similar patterns were evident abroad. Outside the United States, petroleum consumption in non-Communist nations rose 13 percent between 1975 and 1978.221

The bulk of increased U.S. petroleum consumption during this period was supplied largely from refineries other than those of the majors. Although the FRS companies supplied nearly 90 percent of U.S. refinery output in 1975, they accounted for only a third of the

growth in U.S. refinery output between 1975 and 1978, while the output of non-FRS refineries nearly doubled (Table 42). Even in the context of the oil price escalations following the Iranian revolution in late 1978, and subsequent decline in U.S. refined product consumption, the output of non-FRS refiners changed little as the FRS companies bore almost the entire reduction in petroleum demand.

The disproportionate growth of non-FRS refiners was an effect of Federal petroleum price regulations, particularly the "small-refiner bias" built into these regulations. In November 1974, the crude oil entitlements program was established to eliminate disparities in crude oil acquisition costs between refiners who had favorable access to price-controlled crude oil and those who did not. The U.S. Congress further required larger refiners (those with more than 175 thousand barrels per day (mbd) of crude oil throughput) to, in effect, make payments to small refiners that more than equalized crude oil acquisition costs. The objective of this requirement was to maintain the viability of small, independent refiners.

By 1980, the entitlements program had lowered the actual cost of crude oil to non-FRS refiners relative to FRS companies by more than $3 per barrel.222 Accordingly, many small refiners expanded while other enterprises built refineries in order to take advantage of the entitlements program. Non-FRS crude oil distillation capacity grew by over 60 percent from before the Arab Oil Embargo until 1978. So powerful was the attraction of the small-refiner bias that even with U.S. petroleum demand declining by 1.8 million barrels per day (mmbd) between 1978 and 1980, the capacity of nonFRS refiners was nearly 1 mmbd greater in 1980 than in 1978.223 Petroleum price regulations and the smallrefiner bias were terminated in January, 1981, eight months ahead of their scheduled expiration, with the result that non-FRS refinery capacity declined by 26 percent between 1980 and 1981.

output shifted toward lighter end products due to the changing composition of product demand (Figure 36) and environmental mandates. Two indicators of refinery sophistication are the ratio of gasoline-related capacity to distillation capacity and the ratio of heavy/sour crude oil capacity to distillation capacity. In 1974, the FRS companies' ratio of gasoline-related capacity to distillation capacity was 56 percent (Table 43). By 1993, this ratio for the FRS companies had risen to 80 percent. The ability to process heavy fuels also improved over the past two decades as the FRS company ratio of heavy crude oil capacity to distillation capacity rose from 22 percent in 1974 to 47 percent in 1993.

Government Interventions and Regulatory Issues

The 1970's saw a significant increase in Federal Government intervention into the petroleum industry. The interventions deepened during the 1980's and 1990's. As noted earlier, preserving small refiners was one motivation for intervention. Others were concerns related to environmental protection, energy security, energy conservation, and consumer protection.

The reduction of lead additives in gasoline resulting from the Clean Air Act of 1970 (CAA) was one of the earliest major Federal Government environmental

Note: Sums may not equal 100 percent due to independent rounding. Source: Energy Information Administration, Annual Petroleum Review, 1993, DOE/EIA-0384(93) (Washington, DC, July 1994), Table 5.8.