(Author's Note: This essay was completed in June 1974. Subsequent developments have affected some of the facts but not the general conclusions of the essay. 2/10/1975)

From the late 1950s to the beginning of the 1970s four of the principal features underlying the structure of the U.S. oil industry were (1) restrictions on the importation of crude oil and refined products; (2) the rapid growth in the supply of relatively low-cost foreign crude oil controlled by U.S. and other international oil companies; (3) the existence of excess domestic crude oil producing capacity; (4) the existence of excess domestic refining capacity.

Since 1971 all four of these features have either disappeared altogether or are in the process of doing so. In 1971 for the first time since World War II U.S. crude oil production, in the face of rising demand, was no longer able to register an increase over the previous year, despite the absence of any economic production restrictions. Each of the two subsequent years (and probably also the year 1974) have registered an actual decline in production. In 1973 U.S. refining capacity had to be utilized at virtually full operable capacity to meet demand. From the beginning of 1973 on foreign crude oil operations owned or controlled by private oil companies have been progressively transferred to the control and ownership of state agencies of the major oil producing countries; meanwhile, foreign oil costs have risen well above domestic costs. Finally, on May 1, 1973 the U.S. Import Control Program on crude oil and refined products was converted into an open-ended import system.

The following analysis inquires into the impact of these recent structural changes in the U.S. oil industry on the future of independent oil refiners. As a first step in this analysis we must consider how both these segments of the industry fared under the structure in existence before the changes that have occurred since 1971.