Antitrust Law Daily Wrap Up, ANTITRUST NEWS: FTC economists analyze exit, expansion in U.S. refining industry, (Nov 20, 2015)

By Linda O’Brien, J.D., LL.M.

Economists from the FTC Bureau of Economics released a working paper that analyzes the exit and expansion of petroleum refineries in the U.S., using plant-level capacity data from 1947 to 2013. The paper, entitled “The Determinants of Plant Exit: The Evolution of the U.S. Refining Industry,” examines that factors make it more likely that a refinery survives in changing market conditions.

According to the paper, the petroleum refining industry has undergone significant changes since the late 19th century as new technologies have altered how petroleum products are manufactured, transported, and consumed. Specifically, over the last decade, industry observers have pointed to two industry facts: (1) a large number of refineries have closed since the 1980s; and (2) no new refinery has been built since 1976. While the number of refineries has been decreasing since 1940, the focus on closures and lack of new construction misses the main source of current refinery capacity—the expansion of existing refineries.

The economists looked at a number of empirical papers examining factors that increase the likelihood that a manufacturing or processing plant would close. Those studies either reviewed a broad range of industries using data from a survey of manufacturing plants or they concentrated on an industry. Both of those types of studies informed their empirical specification.

The working paper—which expresses the views of FTC economists David W. Meyer and Christopher T. Taylor—found that larger refineries were less likely to close and refineries owned by a multi-plant firm were more likely to close. If a multi-plant firm closed a refinery, it was likely to close its smaller refineries. In contrast to previous literature, there was weak evidence that refineries owned by firms with higher market shares were less likely to close.

The economists made several observations about the refining industry based on historical refinery capacity data. While many recent industry observers have focused on the lack of new refinery construction or the significant decrease in the number of refineries, the economists determined that the focus should be on overall refining capacity. The paper expanded on the literature analyzing the types of plant characteristics that influence whether or not a plant closes. Some of the paper’s results were similar to those of earlier studies. However, unlike several previous studies, the economists were unable to show that higher market shares were associated with an increased likelihood of closure.

The paper notes that refineries that have grown in recent years are less likely to close than those that have not grown. The economists were also able to show that the removal of regulations favoring small refiners that were put in place in the 1970s led to an increased probability. Finally, the impact of complexity was not consistent across all refineries, the paper claimed.

News: Antitrust FederalTradeCommissionNews