Answer to Question #288355 in Microeconomics for Ftking23

Question

The price of oil has been all over the place in the last few years; it went up, then down and back up, back down, and now edging up again, thus driving the price of gas up and down. Right now, it is $2.19 where I buy gas, very low compared to two years ago. Related to that is the cost of refining it into a usable product. We actually have plenty of oil right now; it is scarce, but plentiful, especially with the new development of shale oil fields in the Dakotas and in Texas. However, the country has limited refinery capacity and we have not built a new refinery in over 20 years. The Keystone pipeline, if it is ever built, will carry oil from Canada and North Dakota all the way to Texas to be refined into gas and then trucked back to places like North Dakota and Nebraska. 

Why not refine some of that oil in the region, thus saving a lot of shipping cost? 

Why wouldn't the oil companies build refineries nearer their sources or their markets?

Answer 1

Yes, from the point of view of logical thinking, oil refineries should be built next to the fields. But, most likely, processing in another region will be cheaper than building new plants and operating them, so it’s cheaper to buy finished products

Also, the construction and operation of oil refineries is very expensive, since oil refining is a very complex process that requires expensive equipment and also the industrial safety factor plays a significant role