San Antonio-based Valero Energy Corporation announced early today that it would acquire refiner Premcor Inc. for $6.9 billion in cash and stock plus the assumption of about $1.8 billion of debt, which will the San Antonio company the largest refiner of crude oil in North America.
The deal — which is subject to regulatory approval in the already heavily consolidated refining industry — would give Valero total refining capacity of 3.3 million barrels a day, making Valero’s refining capacity more than that of Exxon Mobil Corp. in North America. The deal gives Premcor shareholders an initial premium of about 20% based on the recent 30-day trading range of Premcor’s stock price.
Valero has been on an refinery acquisition initiative for almost a decade. Beginning in 1997 when it owned only one refinery, Valero has made seven acquisitions and, if the Premcor deal is approved, will have 19 refineries. Valero already became the largest independent refiner in North America in 2001 when it bought Ultramar Diamond Shamrock Corp. for $4.03 billion plus the assumption of $2.1 billion in debt, and the 5,000 retail gasoline outlets involved in that acquisition gave Valero a large retail presence. The Premcor purchase would give Valero four additional U.S. refineries and bring its annual revenue to about $70 billion.
The deal highlights a startling turnaround that has occurred in the refining industry over the past several years. Since the big shakeout in the oil and gas industry that occurred in the mid-1980’s, the refining industry struggled for over a decade. Investment in new refineries slowed to a trickle for a combination of reasons, including overcapacity, inadequate return on investment, oppressive environmental regulations and local political opposition to new and more efficient facilities. As a result, most people do not realize that the last new plant to be built in the U.S. was in 1976, that the number of refineries in the U.S. has declined to 150 at present from 325 in 1981, or that refining capacity for crude oil has declined from about 18.5 million barrels a day to about 17 million barrels per day over the past five years.
Accordingly, while worldwide demand for gasoline has been rising dramatically over the past several years and refiners have struggled to keep pace with increasing demand, the refiners’ limited capacity and low inventories have resulted in substantially improved margins, which is the difference between the price that the refiners’ receive for their product and the price that they pay for crude oil.
Thus, when you hear complaints about high gasoline prices, recognize that the relatively high price of oil is only one component of the problem. Lack of refining capacity is at least as big a reason for the problem, and making it difficult to construct new refineries only ensures continued high gasoline prices.

This New York Times article — entitled The Troubled Oil Company — reviews the Venezuelan dictator Hugo Chavez’s mismanagement of Houston-based oil company Citgo, which is owned by Petroleos de Venezuela, the Venezuelan national oil company. Over the past two years, virtually every high-ranking Citgo executive has resigned, including the refining chief, the chief financial officer, the head auditor, and the marketing director. Here is a previous post on Mr. Chavez’s mismanagement of Citgo.
Although the Times article about Citgo and Mr. Chavez is interesting, it’s always funny how the Times analyzes a government’s mismanagement of a big oil business. As late as 1999, Venezuela was the U.S.’s largest foreign supplier of oil, but then Mr. Chavez took over, began establishing close friendships with anti-business types such as Fidel Castro, and generally started mismanaging the Venezuelan economy. By 2003, Mr. Chavez had cut its exports to the U.S. by 22% and was threatening to cut off oil exports to the U.S. entirely if the U.S. government doesn’t stop meddling in Venezuelan affairs.
Now, if the foregoing were occurring in Saudi Arabia, then the Times would be handling it as a major foreign policy story of impending doom. However, when a crackpot socialist and Castro admirer mismanages oil exports, the Times treats it as a typical business story.
Which is exactly the way the story should be handled. Mr. Chavez’s management of the Venezuelan economy has been horrific, albeit aided by high oil prices. But U.S. oil imports as a percentage of GDP are relatively small, about $132 billion in 2004 compared with a about a $11 trillion GDP. That’s about 1%, folks. Thus, if Mr. Chavez chooses to sell us less oil, hopefully the U.S. government shrugs, we replace Venezuelan oil with oil from the numerous other markets, market prices adjust, and we get on with getting to work.
Besides, if the U.S. government is going to take a hard line with an oil exporter, don’t you think that the government should take that stance with the country from which we import the most oil? Oh, and what country is that?
Answer: Canada.
Hat tip to Bryan Caplan for info on the Venezuelan oil imports.