increase in the relative price and crack spread. We use monthly crude oil inventory and gasoline
inventory data collected by the EIA to represent the conditions in these two markets. The
gasoline stock and crude oil stock data for the East Coast region from 1995 to 2007 are shown in
Figures 3 and 4, respectively.
Refinery Capacity and Capacity Utilization Rate
Refinery capacity is a critical factor influencing the profitability of the refinery industry. Figure 5
presents the operable crude oil distillation capacity in the five PADD regions from 1995 to 2007.
In this figure, refinery capacity is represented by monthly data of atmospheric crude oil
distillation units (barrels per calendar day). Total refinery capacity increased by 13% over the
past 12 years, with PADD III, the Gulf Coast, having the highest growth of 19%. The lowest
increase in capacity occurred in the Midwest, with a 4% growth over the same period.
The monthly percent refinery capacity utilization rates for 1995 to 2007 for PADDs II, III, and V
are shown in Figure 6. Here, refinery capacity utilization is based on gross input to atmospheric
crude oil distillation units divided by the refinery operable distillation capacity. The average rate
over five regions is 92%, which means that capacity utilization has increased significantly and
refineries are running at high rates of utilization. Refinery capacity and its utilization rate are
variables that will affect gasoline price and refinery profits via higher prices for products and
possible increases in marginal costs.
Market Concentration
Mergers and acquisitions among refinery firms may potentially further reduce the competition in
the refinery market, thus possibly leading to a higher refinery margin. To measure the level of
market concentration, the Herfindahl-Hirschman Index (HHI) is commonly applied in the
literature. The HHI of a market is calculated by summing the squares of the percentage market
shares held by the respective firms as
Nt
HHI = ∑Si2
tit
i=1
where Sit is the market share of a specific firm in the corresponding production market with total