An Empirical Study of Selected Causes and Effects of Semirigid Prices in the Petroleum Refining Industry with Emphasis on the Period 1963 through 1972
Date of Graduation
Doctor of Philosophy in Business Administration (PhD)
Jackson A. White
Nolan E. Williams
Second Committee Member
Robert C. Haring
Third Committee Member
Donald H. Taylor
Fourth Committee Member
David E. R. Gay
Petroleum industry, industry prices, refinery investment, wholesale gasoline prices, refining industry
The premise of this study is that certain policies within and without the petroleum industry have interacted to produce semirigid industry prices. One effect of this price rigidity is the inflexibility that is passed on to costs whenever the traditional joint-cost-accounting allocation (based on relative market value) is used in conjunction with these prices.
In studying the problem, activities and policies which combined to cause artificial price restraints in the petroleum-refining industry from 1963 to 1972 were reviewed. The accounting and economic implications and the effect on refinery investment of the resulting semirigid prices were investigated.
Published wholesale gasoline prices were compared with the wholesale price indexes from 1963 to 1972. The gasoline price trend was significantly different from the intense inflationary trend which began in 1964. A test of regression line slopes covering the inflationary period resulted in a rejection of the null hypothesis of slope similarity. Therefore, no adjustment for price-level changes was necessary.
A major reversal in the wholesale gasoline price trend was found to be centered on 1959, and appears to be caused by the Oil Import Program. Marginal cost pricing when discontinuities existed, coupled with industry policy rigidities, added to the undesirable effect of government involvement in the refined-products marketing picture. This involvement was further complicated by rigid policies and biases of other nonindustry groups.
Unyielding adherence by each group to policies that needed modification appeared to cause the price rigidities. Government officials pursued a low-cost-energy policy with a threefold effect: (1) A low-price natural-gas policy encouraged consumption and held competing product prices low. (2) Import restrictions on residual fuel oil were frequently reduced to maintain low prices, increasing import dependency. (3) The wholesale gasoline price was attacked from the two following sources when a disproportionate percentage of crude oil was allowed to marginal producers: (A) Government policies interacted with a marginal-cost pricing scheme to produce an unstable price-depressing effect in the industry. (B) The government then forced a rollback in price advances of refined products by threatening complete removal of import controls. These external interferences placed upward rigidities on price and drove the average return on investment for the industry below the national average for all manufacturers.
Uncertainties introduced by ecological considerations, along with the low return on investment, temporarily halted most new construction. Large companies changed from a policy favoring totally new refinery construction to one which balanced refinery facilities. Smaller firms continued to rely heavily on construction with used equipment to hold down investment costs.
Without modification, the economic models presented in the literature failed to explain the activities of an industry with all the outward appearance of an oligopoly. The refining industry appeared (for a limited time) to be unable to function as an oligopoly. The writer attempted to show the possible effects of government intervention by presenting two modified economic models. Both the conventional kinked-demand-curve approach and one designed to provide for external as well as internal constraints were considered.
A review of the price-relative joint-cost allocator disclosed a time interval during which this accounting allocator proved invalid. Inquiry revealed an industry trend toward the managerial use of a volume allocator rather than the price-relative cost allocator. The industry, now faced with extensive planning and control problems, will face even more pressing requirements for detailed accounting information. Thus it seems essential for the industrialist and the academicians to work together in striving for a more realistic solution to the cost-allocation problem, a solution which may be multi-staged.
Feller, R. E. (1975). An Empirical Study of Selected Causes and Effects of Semirigid Prices in the Petroleum Refining Industry with Emphasis on the Period 1963 through 1972. Graduate Theses and Dissertations Retrieved from https://scholarworks.uark.edu/etd/3334