THE FINANCIAL PAGE.(The Talk of the Town)(Marathon Oil)

At first glance, there's nothing unusual about the refinery that Marathon Oil owns in Garyville, Louisiana. Like most refineries, it is in a small town near a port. It can refine two hundred and forty-five thousand barrels of oil a day, which is around the industry median. And the people who live near it have got used to the smell of sulfur dioxide. Indeed, the only thing that's special about the Garyville facility is that it was opened in 1976. That makes it the last refinery ever built in the United States.

Until recently, this didn't seem like a problem. Gasoline was cheap, and no one was clamoring to live next to a highly combustible chemical plant. So, over the past twenty-five years, the number of refineries in the U.S. has been cut in half, and although the remaining ones have expanded, they haven't kept up with the growing demand for gasoline. But now, with voters furious about three-dollar-a-gallon gas, Washington has decided that this trend must change. Samuel Bodman, the Energy Secretary, has exhorted oil companies to use some of their hefty profits to expand refining capacity, and Congress is considering streamlining the environmental regulations that add to the expense of building new refineries. The hope is that, with a little push and pull, refiners will embark on a building spree to ease the pressure at the pump.

Unfortunately, the lack of capacity that Washington sees as a crisis looks like an ideal business model to oil refiners. There are so few refineries in the U.S. now that they are run tight to the bone, typically using about ninety per cent of their total capacity. The result is that refining--which, until recently, was a tough, low-margin business--has become tremendously lucrative. Last year, refiners' profits jumped thirty-nine per cent, to twenty-four billion dollars, and this year should be even better. In California, gasoline prices have risen forty-eight per cent since the end of last year, even though crude-oil prices are up just seventeen per cent. Most of that difference has gone straight into refiners' pockets.

In a normal marketplace, of course, high prices and profits would drive companies to expand, in an attempt to capture more of the market, or else new players would emerge, hoping to outmaneuver a risk-averse establishment. But the refining industry isn't a normal marketplace. For one thing, refineries are huge investments--a new one costs at least two billion dollars--and they take a long time to open. This means that although refiners might make more money by opening new facilities and thus serving more customers, they'd rather take the sure money than gamble. It also means it's hard for new competitors to raise enough capital to enter the market at all.

What's more, over the past fifteen years refiners have been buying each other up, creating an industry that's highly consolidated. In 1993, the five biggest refiners in the U.S. controlled thirty-five per cent of the market. By 2004, they controlled fifty-six per cent. ...