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Along the Gulf Coast of Texas, the most pristine skylines were the white towers of the oil refineries. The refinery town of Port Arthur, for example, was a humble collection of crumbling stone buildings, bandaged with sheets of plywood over broken windows. The sidewalks were jagged with weeds and cracked cement. Many of the houses needed paint jobs and new roofs. But when one left town and drove along the coast, the vast, white towers of the oil refineries appeared like a mythical city. These self-contained cities behind tall fences and barbed wire were active around the clock, steam pouring from the towers during the day and lights twinkling on their crowns throughout the night. It seemed impossible 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 per barrel—nearly triple the next-highest rate of almost $6 a barrel in Europe. These profit margins were partly the gift of fracking, which delivered copious amounts of cheap oil to refine. In a double stroke of good luck, fracking also cut the cost of natural gas, which refiners used to power their plants. US refinery profits pulled far and above those found elsewhere in the world.
If Koch Industries reaped the average level of profit on refining oil at Corpus Christi that year (and the company claims to be above average in this regard), and operated the refinery for 350 days of the year at 280,000 barrels per day (both conservative estimates), then the company would have earned $1.2 billion in profits from that refinery alone.
The profit margins fell sharply after 2011, sinking to around $13 per barrel in 2012 and then $12 in 2014. But the profit margins never fell close to zero, and were always well above margins for refineries around the world.
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Koch enhanced the profitability of its Corpus Christi refinery complexIII by using its trading desks in Houston. From their vantage point, Koch’s traders could see the reality of the US fossil fuel system, which was a fragmented network held together by aging infrastructure. There was no national, let alone global, price for oil and gasoline. There was only the constellation of opaque nodes where real oil and gasoline were bought and sold, and the tanker farms, gasoline terminals, and import piers where barges were loaded and unloaded. It wasn’t easy to get fossil fuels from one region of the country to another. Markets in California were hemmed in by the state’s clean-fuels standards, locking in high prices there. Markets on the East Coast were dependent on a single, aging pipeline called the Colonial Pipeline, which carried gasoline from the Gulf Coast all the way to New Jersey. (Koch Industries was the majority owner of the Colonial.) This fractured market provided abundant opportunities for trading, and Koch excelled in executing on them.
Corpus Christi became the hub for a number of trades that were, in the eyes of traders, simply elegant and beautiful. Koch bought the cheap oil that was piling up in terminals around the Eagle Ford Shale, the superlight crude that only a limited number of refineries could process. Then the traders sold refined gasoline products into markets of thriving metropolitan areas where gasoline supplies were tight, such as San Antonio and Austin, Texas. Both of those cities were growing, thanks in part to the fracking boom in Texas, and the growth locked in strong demand for gasoline. Neither city had a robust public transportation system and both of them were defined by sprawling networks of highways that conveyed motorists from far-flung suburbs to work every day.