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October
State and Local Government Activities
in the Tenth District . . . . . . . .
page
1960
3
Recent Adjustments
in Petroleum Refining . . . . . . . page 10
Current Charts and Statistics . . . . . page 16
FEDERAL RESERVE
BANK
OF KANSAS CITY
Subscriptions to the Mo TIILY REvrnw are available to the public without charge. Additional
copies of any issue m,ay be obtained from the
Research Department, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
State and Local Government Activities
in the
Tenth District
homa, and Wyoming. 1 Most of the basic data
used in this article were obtained from the
U. S. Census of Governments: 1957-the most
comprehensive recent source of information
on state and local government activities.
Education
I
THE AucusT 1960 Monthly Review, some
aspects of the significance of state and local
governments in the national econ01:1y were
considerccl. ln addition, the kvel of genera]
stale and local gov<'rnmcnl cxpc11ditu1Ts was
compared among six stales in the Tenth Federal He.serve Distrid and the United States.
State and local government outlays per person
in District states were found generally to be
high relative to the national average and to
vary considerably among the states. Disparity
in state per capita personal income levels was
found to be associated in a general way with
differences in per capita state and local expenditures, both in the Nation as a whole and
within the District. However, income differences did not explain the higher-than-national average level of outlays in District
states, nor did they account fully for discrepancies among the states.
In the present article, rnstrict per capita state
and local government activities are viewed
in terms of the major functions performed
by such governments. This is done not only
because information on these functions is of
interest in its own right, but also because it
permits a clearer identification of the fa:t~rs
associated with differing levels of activity
among states and regions. While the experience of governments across the Nation is
often looked to for factors which influence
state and local government functions, the primary focus is upon six District states-Colorado, Kansas, Nebraska, New Mexico, OklaN
Monthly Review • October 1960
Across the Nation, education accounts for
more variation in per capita state and local
government expenditures than any other function, despite the fact that ontlays for it are
relatively kss variable from slate lo state than
those for most other major functions. This apparent anomaly results from the large absolute size of education expenditures. Nationally, they accounted for around 35 per cent
of general state and local government outlays
in 1957 - an amount equal to about 3 per cent
of gross national product. Among the District
states, education outlays were responsible for
34 to 39 per cent of the total. Despite this
comparatively small variation in the proportion of general outlays devoted to education,
differences in per capita dollar amounts were
large. Only highway expenditures, among the
other categories of outlays, showed about as
large a range in the District. Indeed, the
range of education expenditures was far greater than the total spent for any other function
except highways and, in the case of two states,
public welfare.
1 WhilP a significant share of the population of the
Tenth District resides in Missouri, the largest influence upon state and local expenditures in that state is
beyond the hounds of the District. Unfortunately, it
is not possible to make meaningful comparisons of
state and local activities in the District portion of Missouri with other District states. A number of conceptual and statistical problems involved in making interstate comparison of state and local government expenditures are discussed in the August 1960 Monthly
Review article.
3
State and Local Government Activities
Nationally, interstate differences in per capita education expenditures display considerable association with variation in per capita
incomes. However, high per capita expenditures are not necessarily always associated
with a proportionately larger amount of education services. Costs of such services differ
from place to place and a large clement in this
disparity is variation in school salaries. Ordinarily well over half of local school expenditures are for payroJls, of which by far the
largest portion goes for teacher salaries. These
salaries are comparatively about as variable
as outlays and relatively more variable than
the salari<'s or all ollwr public <'lllploy<'cs.
ationally as lllight l><' c,pcdcd teacher
'>alarics arc closely cm-r<.·latcd with per capita
i11conws. Thcrdore, the national relationship
hetw(•cn per capita incomes and per capita expenditures for education is to some degree
attributable to teacher salaries. Since such a
large share of education outlays is for payrolls, school employment provides one measure-albeit a very crude one-of the actual
level of services rendered.
Per Person Education Activity High in District
\Vhethcr measured in terms of employment
or - with one cxc('ption - in terms of outlays,
each District state purchases more education
services per person than the national average.
They do this despite the fact that their per
capita incomes arc generally below the national average. However, several factors can
be identified which indicate that the "need"
for education services in District states is
unusually large. Possibly the most obvious of
these is the high proportion of the population
enrolled in elementary and secondary schools.
In this regard, each state-except Nchraskacxcceds national cxp('ricncc hy a su hstantial
margin. This is in considerable measure attrihutahlc to an age pattern which in most instances contains an unusually great number
of school age persons. An additional factor
which tends to raise demands upon Dish·ict
4
education systems is comparatively low density of population. While at least one recent
study has indicated that economies of enlarged size are rather quickly exhausted in
education plants, extremely low density
probably does contribute somewhat to inefficient plant size. Furthermore, the cost of
assembling the student body tends to be high
in a sparsely settled area.
The high level of per capita education outlays in the District is partly accounted for by
advanced ( college and university) education
upon which each state spends more than the
national average. This is true of both total
outlays and of operating <'Xp<'nclitmcs. Inch-cl, i11 19S7, Colorado spent 011ly slightly
ll'ss pn capita for higher education than the
lop stat<.' in the Nation a11cl in the same year
New Mexico incurred higher per capita current operating outlays than any other state.
Each of the District states also employed
more people in higher education relative to
population than the United States average,
with New Mexico ranking second in the Nation. While various reasons for this play a
part in each of the states, at least one factor
is common to all of them. In each case the
percentage of the population enrolled in public institutions of higher cclucation exceeds
that in the Nation generally. This results both
from high over-all advanced education enrollment and from the fact that a large percentage of it is in public institutions. In some
states outside the District, where advanced
education expenditures and employment are
comparatively low, a large portion of enrollments is in private institutions. This is especially notable in several New England states.
In som District states-Colorado is a striking
example - higher education enro1lments are
inflated by unusually large numbers of nonresident students. In terms of financing requirements, large enrollments of such students
are at least in part offset by the comparatively high nonresident fees they pay.
in the Tenth District
Table 1
Education Activities In District States In 1957
General
Expenditures
Per Capita
All Functions Rank
Wyoming
New Mexico
Colorado
Kansas
Oklahoma
Nebraska
U. S. Average
$ 328
279
280
271
248
202
237
1
3
2
4
5
6
Education
Expenditu res
Per Capita
$ 120
109
102
92
88
78
83
Rank
1
2
3
4
5
6
Per Capita
Expenditures for
Local
Schools
$ 94
82
76
73
67
61
70
Rank
1
2
3
4
5
6
Per Capita
Capital
Outlays for
Education
$ 25
19
25
19
18
14
19
Rank
1-2
3-4
1-2
3-4
5
6
Enrollment in
Local Schools
Per Full-Time
Education
Employee
15
17
16
15
17
15
17
SOURCE : U. S. Census of Governments: 1957.
Local School Expenditures in Individual States
The number of public elementary and secondary school students per education employee dicl not differ greatly from stale to
slate in the District in HJ.57. Thus, in looking
at differc.·uces in local education expenditures
among the individual District states, an interesting question presents itself. Why do per
capita education expenditures at the local
level vary so much when the amount of educational services rendered per pupil-measured by the rough standard of employment-is
for the most part not radically different? In
each state a pattern can be discerned which
probably goes a long way toward an answer.
Wyoming, which in 1957 ranked next to the
highest in per capita local school expenditures
nationally and highest in the District, did so
largely as the consequence of a series of reinforcing factors. To begin with, the state has
a high per capita income and the rate of pay
for teachers is correspondingly high. In addition, a large percentage of the state's population is enrolled in local public schools and
comparatively rapid growth in enrollment has
given rise to large capital outlays. Furthermore, Wyoming is among the more sparsely
populated states in the union. The latter fact
may well help to account for a somewhat
smaller number of pupils per employee than
in other District states. In addition, low density tends to increase per pupil costs incurred
outside the classroom.
Monthly Review • October 1960
Nebraska, at the other end of the expenditure spectrum , presents a more complicated
picture. Its per capita ineom<' is around the
average for the District hut per capita expenditures for education in 19.57 W<'rc ,wll l)('low
even those in Oklahoma - the lowest income
state. Partly accounting for this is the fa ct
that enrollment of students in primary and
secondary schools was substantially lower in
regard to population than elsewhere in the
District. Similarly, the median pay of teachers in Nebraska was well below that of any
other District state. Reinforcing these factors
was a comparatively low rate of increase in
enrollment, with correspondingly small capital
outlays per person. This combination of factors helped lo produce low per person education expenditures despite a relatively high
ratio of employees to students in elementary
and secondary schools.
New Mexico also presents an interesting
case. In 1957 its per capita income was near
the lowest in the District and ranked 31st
in the Nation. Despite this, more was spent
per person for local schools than in any other
District state except Wyoming and more than
in all hut six other states in the Nation. Important elements in the explanation for this
situation were New Mexico's large student
enrollment relative to population, which was
greater than in any other District state, and
the fact that it ranks next only to Wyoming in
low density of population. However, an im-
s
State and Local Government Activities
portant additional aspect is the fact that the
median pay of teachers in New Mexico was
well above that of any other District state.
This is rather puzzling in light of New Mexico's comparatively low per capita income.
However, it may well be related to another
factor which helps to explain the state's high
expenditures per person, i.e., the rapid increase in school enrollment in recent years.
This growth required the state to engage substantially in capital outlays and may have
made it necessary, as well, to attract teachers
from outside the state.
Colorado has a smaller percentage of its
population enrolled in local schools and is
more densely populated than New Mexico or
Wyoming- the District states which cxcccclecl
it in per capita outlays. On the other hand ,
elementary and secondary school enrollment
in Colorado has risen faster than in any other
District state. This was reflected in unusually
heavy capital outlays for local schools. The
balance of these factors combined with somewhat lower teacher salaries than in New Mexico and Wyoming resulted in local school outlays below the level of the other Mountain
States but above the remaining District states.
Kansas and Oklahoma- whose 1oca1 school
outlays fell well below those of Wyoming,
New Mexico, and Colorado, but were above
the national average-have several features in
common. Both have a low density of population by national standards but considerably
higher than any of the other District states.
While school enrollment in Oklahoma has
tended to decline somewhat in recent years
and Kansas has shown some increase, the rise
in the latter was far less than that experienced
in the Mountain States. At least partly as a
consequence, neither spent as much per capita for capital outlays in 1957 as did the
Mountain States. In addition, Kansas and
Oklahoma differed relatively little in median
annual teacher salaries and were well below
the Mountain States. In some respects, how-
6
ever, they were highly dissimilar. While
Kansas was about equal to the District average in terms of per capita income in 1957,
Oklahoma fell considerably below any of the
other states. On the other hand, Oklahoma
ranked comparatively high in enrollment relative to population while Kansas fell near the
District low. Furthermore, Oklahoma had one
of the highest ratios of students to full-time
education employees in the District, while
Kansas ranked much lower in terms of this
measure. The various factors influencing education expenditures in the two states resulted
in a slightly higher per capita outlay in Kansas than in Oklahoma.
Highways
Spending on highway construction and
maintenance accounts for roughly 20 per cent
of the general outlays of state and local governments in the United States and typically
for a somewhat higher percentage in the District. In 1957, per capita highway expenditures ranged from $25 in South Carolina to
$107 in Connecticut and they were relatively
the most variable of the major categories of
state and local outlays. A high degree of
variability is not surprising, perhaps, since
over two thirds of highway exp enditures were
for capital outlays and of these more than four
fifths were for construction. Construction
tends to be undertaken in large projects and,
therefore, shows considerable variation, not
only from state to state but also at different
times in the same state. In 1957, variation in
highway expenditures in District states, on
balance, tended to reinforce the differences in
per capita expenditures attributable to education. Consequently, by far the greatest portion of total variation in per capita outlays
was du e to those two functions.
Variability and the important role played
hy Federal financing tend to obscure whatever
correspondence there may be b etween highway expenditures and some of the factors that
in the Tenth District
Table 2
Per Capita State and Local Government Expenditures
On Functions Other Than Education In 1957
Wyoming
Kansas
New Mexico
Colorado
Oklahoma
Nebraska
U. S. Average
Highways
Rank
$ 93
81
66
54
54
51
46
1
Public
Welfare
2
3
4-5
4-5
6
$ 17
22
20
44
46
14
20
Rank
5
3
4
2
1
6
Health
and
Hospitals
$ 25
18
17
17
12
14
19
Rank
1
2
3-4
3-4
6
5
Urban
Type
Services
$ 17
20
20
25
17
16
30
Rank
Other
Outlays
4-5
2-3
2-3
1
4-5
6
$ 58
39
46
39
31
29
40
Rank
1
4
2
3
5
6
SOURCE: U. S. Census of Governments: 1957.
might be expected to influence them. For example, in 1957 there did not appear to be any
straightforward relationship between per
capita income and highway expenditures
across the Nation other than near the ]ow end
of the state income <lis trihulion, where difficulties in obtaining matching funds may be particularly important.
Tl1e District states fell rather conveniently
into three classes in regard to their per capita
highway expenditures in 1957. Wyoming and
Kansas were considerably above the other
states and the national level. New Mexico fell
somewhat lower but remained well above the
national average. Colorado, Oklahoma, and
Nebraska diverged little and were more moderately above the national average.
While individual state expenditure levels
are associated with specific and often transitory factors, a generally higher-than-national
level of highway activities per capita has been
characteristic of District states in recent years.
This is true whether activities are measured in
terms of operating expenditures, capital outlays, or employment. To a large degree the
high level of activity probably is associated
with less-than-average density of population
combined with a location athwart major eastwest throughways. Thus, the number of persons per unit of surfaced road is much lower
in each of the District states than in the Nation generally and the number of motor vehicles relative to population is appreciably
higher. In addition, a significant portion of
Monthly Review • October 1960
the District's highways are in mountainous
terrain where costs of maintenance and construction are high. All these factors were reflected in Wyoming's unusually great - next
to the highest in the Nation- per capita highway expenditures in 1957. For the most part,
similar factors are involved in accounting for
New Mexico's high rate of expenditures.
Furthermore, both New Mexico and Wyoming were among the early large participants
in highway funds allotted under the Federal
Aid Highway Act of 1956.
On the other hand, the high rate of spending in Kansas in 1957 cannot be accounted
for in this manner. By District standards, Kansas is not particularly sparsely populated,
Federal participation was not extraordinarily
large, and the state's highways are not in unusually difficult terrain. The major reason for
the state's high outlay was a heavy investment
in the state-operated Kansas Turnpike in that
year. Oklahoma also made a large toll road
investment-in the Will Rogers Turnpike-but
that in Kansas was larger, accounting for
almost a third of total highway expenditures.
Other State and Local Government Activities
The functions already discussed, plus expenditures for public welfare and health and
hospitals, account for about 70 per cent of all
state and local government outlays. Outlays
on the latter two categories are on the average
of comparable size and considerably smaller
than those for education and highways. The
remaining expenditures are for provision of
7
State and local Government Activities
a number of services associated with urban
areas and for a variety of other purposes.
Public Welfare
Public welfare expenditures show virtually
no positive relationship to per capita income.
This is illustrated by the fact that in 1957 per
capita outlays for this function ranged from
about $7 per p rson in Virginia to about $46
in Oklahoma, both of which stand quit low
on the scale of per capita incomes. Lack of
association with income is the joint consequence of a variety of factors. For one thing,
the Federal Government participat s unusuaJly heavily in th' w •Hare field. ationally,
almost half of stat' and local expenditures on
wdfar , have hecn finaHc cl from Federal con tributions in re '<'nt y<'ars. S ·cond, at least in
some of the highest 'xp 'nditure stat 'S, lib •ral
old-age assistance influences
xp nditures
heavily and per capita outlays on this function show no positive relation to income.
While old-age assistance is, of course, related
to the age structure of the population, there
is in addition wide variation from state to
state across the Nation, not only in payments
per beneficiary but also in the proportion of
the population over 65 r ceiving assistance.
This variation r sults from diff renc s in law ,
interpretation of laws, and th in om' status
of the aged. Third, whil high income is oft n
associated with urbanization which, tak n by
itself, tends to increas welfare case loads,
high income as such would probably tend to
reduce them. Consequently, the lowest per
capita public welfare costs might be expected
in high income states with low urbanization,
relatively youthful population, and low oldage assistance payments.
Thus Wyoming, which di plays most of the
features that might be xpected to produ e
moderate levels of w Hare paym nts, ranks
near the District low in per capita outlays for
the function. This is particularly impr s ive
in light of the fact that the state has rank d
highest in both of the other functions thus far
8
considered. On the other hand, the influence
of old-age assis tance payments on per capita
w lfar outlays is notable in Oklahoma, Colorado, and Kansas, but most striking in the
former two. Oklahoma, which ranked lowest
in per capita income among the District states
and 36th in th Unit d States, spent more per
capita on public w lfar in 1957 than any
other state in the ation. While aid to cl pendent children is quite a large welfare factor in the state, about three fourths of the
total expenditure on welfare was for old-age
assistanc . Colorado, though spending less per
capita on old -age assistance, used an even
largc•r portion of its public W<'lfare huclgct for
th e purpose•. Colorado ranks ('Otnp,1ralivcly
high in th<' Nalioll , both in terms of benefits
paid per rec:ipi<'nt aiid case load relative to
population. On the oth 'r hand, Oklahoma is
somewhat less generous in awarding benefits
but its case load is strikingly high both in regard to total population and in relation to the
older members of the population. The other
District states- ebraska, New Mexico, and
Wyoming-differed comparatively little in per
capita old-age assistance payments in 1957
and were som what below the national m an.
In regard to old-age assi tanc and ducation expenditures, it i interesting to not that
an age distribution of the population which
tends to r quir' hug' expenditure for these
purposes is also one which, other things being equal, tends to depress income. A recent
study of state income differentials found that
the proportion of the population above and
below working age bears a significant negative relation to state per capita income. Thus,
greater tax effort may be requir d in some
states exhibiting th sc age haract ristics not
only h cause ne('ds arc greater but also h caus the ability to m t them i 1 s.
Health and Hospitals
Health and hospital xpenditures ar financed almost exclusiv ly from state and local
revenue sources, since F deral funds gener-
in the Tenth District
ally account for less than 5 per cent of the
outlays for this function. At least partly as
a consequence, per capita health and hospital
expenditures are rather closely associated
with income across the Nation.
At first glance, such an association does not
appear to exist among the District states.
While Wyoming-with the highest incomedoes spend distinctly the largest amount, and
Oklahoma- the lowest income state-spends
the least, outlays by the other District states
do not show a discernible relationship to income. However, if current operating costs are
considered separately, a more distinct association appears . For example', hoth Kansas and
New Mexico, which stood higher than OIH'
would ex1wct on the basis of income, undertook large per capita capital outlays in 1957,
and Colorado, which ranked lower than
would have been expected, undertook relatively little investment in that year.
lays of the District states. In most instances,
per capita expenditures on these functions are
comparatively small and, therefore, do not
differ by substantial amounts from state to
state. The most variable and perhaps the most
interesting-from the point of view of the District-of the remaining outlays are those for
natural resource activities. Each District state
spends more per capita than the national average in the resources area, with the highest
outlays occurring in states where natural resources assume a particularly important role.
Other Functions
range is of the median. The coefficients for the major
types of state and local government expenditures
across the Nat ion arc as follows: total education 17.6;
highways 21.2; public welfare 1.15.0; health and hospitals 20.0; police and local fire protection 24.4; sanitation 30.6; and natural resources 49.1.
Concluding Statements
The foregoing analysis of the factors which
appear to be associated with differing levels
of per capita state and local activities cannot,
of course, claim to he complete. For example,
specific institutional arrangements in the
various states may play an important role in
limiting or accentuating expenditures. Mat"Urban Type" Services
ters such as earmarked taxes, debt limits, and
A group of expenditures which can be · property tax limits may lag in adapting to
rather conveniently considered together are
changed circumstances. To a degree, concepfor what might be termed "urban type" servtions of acceptable levels of services differ
ices. This category includes expenditures for
from state to state. These matters no doubt
police and local fire protection, sanitation,
play a significant- but hard to quantify-role
local parks and recreation, housing and comin determining activity levels. Nevertheless,
munity redevelopment, and local libraries.
the factors which have been cited in this
Since these arc services ordinarily rendered
study are ones which previous investigations
within urban areas, it is not surprising to find
and perusal of the 1957 Census suggest are
them smaller in the District states than in the
significantly related to expenditure differNation generally. Per capita outlays for these
ences at a national level and in most instances
purposes were less than the national average
they form a logical pattern in regard to the
in each District state in 1957. Relative to other
District states.
types of expenditures they were even more
TECHNICAL NOTE: In several places in the text,
markedly below the national average. In the
reference is made to the relative variation displayed
District, outlays for these items ran between
by particular variables. The measure used to indicate
5 and 9 per cent of the total, whereas nationrelative variation is a coefficient determined by computing the percC"ntage which the semi-interquartile
ally they constituted over 12 per cent.
The remaining expenditures of state and
local governments are for a miscellaneous
group of functions which, in 1957, absorbed
between 12 and 17 per cent of the total outMonthly Review • October 1960
9
Recent Adiustments
in Petroleum Refining
has been centered
recently on petroleum refining as a result
of the dramatic turnabout of conditions in
that industry. After enjoying unprecedented
prosperity in late 1956 and early 1957, petroleum refineries have since operated under
considerably less auspicious circumstances.
Whil · developments in the industry unc.louhtedly reflected the impact of the recession in
1958, there is some evidence that the problems
facing the industry have persisted during the
business recovery. For example, high levels
of excess capacity and burdensome stocks of
refined products still persist. This situation
reflects comparatively small increases in demand for refined products and continued increases in total crude oil refining capacity.
With these factors in mind, this article has
several objectives. First, developments in the
demand for refined petroleum products and
changes in refining capacity in recent years
are described. Second, inducements to invest
arising out of changes in the nature of demand
for petroleum products and technological developments in the industry are discussed.
Third, the current level of capacity utilization is analyzed in terms of more prosperous
years in the petroleum industry. Finally, some
explanation of the continuing expansion of
refining facilities in light of the low rate of
utilization of existing capacity is undertaken.
While this discussion is of direct relevance to
the petroleum industry, it may also have some
implications for other industries where capacity is more than adequate. Recent low rates
of utilization in some manufacturing industries have given added interest to analysis of
ONSIDERABLE INTEREST
C
10
investment under conditions of excess capacity.
Although the factors responsible for the
problems facing the petroleum industry have
become more evident in the past few years,
some of them appear to have been developing for a considerable period. The influence
of these factors was delayed and obs urecl by
tlw occu1T('nce of extraordinary circumstances,
such as the Korean War, the oil shutdown
in Iran, and the closing of the Suez Canal.
For the purpose of describing the turnabout
of conditions in the petroleum industry, developments from 1946 to 1956 have been contrasted with those from 1956 through 1959.
In the decade following the end of World
War II, demand for refined products grew at
a relatively rapid rate. Since then, the industry has had to cope with a number of influences - some short run and others reflecting
longer-term factors - which have tended to
depress demand growth. The increase in overall demand declined from an average annual
rate of 6 per cent in the postwar decade to
an average rate of less than 2 per cent in the
past 3 years.
Changes in the Rate of Increase and
Structure of Demand
Several factors have caused demand for refined products to grow at a slower rate in
the past 3 years than in the previous decade.
The sharp dip in business activity which
reached a ]ow in 1958 undoubtedly had an
adverse eHect on demand. Total energy consumption in the United States-measured in
BTU equivalents of coal, petroleum, natural
Recent Adjustments in Petroleum Refining
gas, and water power-declined in both 1957
and 1958. This was the first time in the postwar period that energy consumption had declined 2 consecutive years. In the decade after World War II, growth of this measure of
aggregate energy consumption proceeded at
an average rate of 3.4 per cent annually.
While information for 1959 is not available,
energy consumption undoubtedly increased to
some degree, as previous movements in this
series have conformed roughly to movements
in gross national product.
Factors other than short-run business conditions in the U nilccl States were responsible,
al least in part , for the slower rate of growth
of demand for refined procl11cts sine<' H)56.
CNlainly one of the most widely fluctuating
influences on total demand was exports of
refined products. After increasing at an average annual rate of 3.4 per cent from 1946 to
1956, exports registered an annual decline of
9.5 per cent on the average from 1956 to 1959.
Exports of refined products in 1959 were at
the lowest point since 1950. Thus, by 1959
foreign demand had sustained a sharp decline
from the 1957 peak as the abnormal conditions
responsible for the stimulation of demand during the Suez crisis swiftly moderated.
On the other hand, longer-term developments in domestic demand also have been
significant, although somewhat less striking
than the reversal in exports. During the period from 1946 to 1956, consumption of petroleum products-excluding natural gas-increased at a rate of 6 per cent annually in
contrast to a 3.4 per cent annual increase in
total energy consumption. As a result, consumption of petroleum products accounted
for 44 per cent of the energy market in 1956
as opposed to 34 per cent 10 years earlier.
While there was no reason to conclude that
the portion of the energy market which petroleum had captured by 1956 was the maximum penetration it would ever achieve, there
was some reason to believe future gains at
Monthly Review
•
October 1960
the expense of other fuels might be at a moderated rate. It does not appear likely that refined petroleum products will ever completely
displace other energy sources, and indications
are that the process of substituting petroleum
products for coal in household heating and
as railroad fuel have been largely completed.
In addition, the consumption of natural gas
has shown particularly impressive gains in
recent years and these gains have been, at
least in part, at the expense of refined products. While increasing at an annual rate of
more than 9 per cent from 1946 to 1956, natural gas consumption increased its share of
the total energy market from 13 to 23 per
('<'Ill. Further gains of nearly 6 per cent in
the consumption of this f ucl W('rc n•corclcd
in both HJ.57 and 19,58, increasing the market
penetration of natural gas to nearly 27 per
cent. In part, this may have reflected the
lesser sensitivity of natural gas to business
cycles, but the large gains during recession
years were quite impressive. In contrast, the
rate of increase in domestic demand for refined petroleum products in the 3 years after
1956 averaged less than 2½ per cent.
Components of Domestic Demand
Understanding of changes in aggregate domestic demand for refined petroleum products is aided by an examination of trends in
its various components. Over the entire postwar period the demand for gasoliue has increased roughly in line with total domestic
demand for refined petroleum products. In
1946, gasoline consumption accounted for 41
per cent of domestic demand, while in 1959
it constituted 43 per cent of the total. The
average rate of increase in consumption of
this fuel has slowed considerably, however.
A 6.5 per cent annual rate in the 1946-56 period slipped to a rate of 2.5 per cent in the
past 3 years. During the entire period, on the
other hand, there has been a continuing increase in octane ratings of gasoline for automobile use.
11
Recent Adjustments
Demand For Refined Petroleum Products
MILLION BARRELS
8000
SEMI-LOG SCALE
6000
4000
2000
1000
800
600L---~,,,,,,----::::::::.-----_:-_~;_;_::..=.;:::~
400
200
100
80
60
40
20
*
* EARLIER
DATA NOT AVAILABLE
NOTE : On a semi -logar i thmic chart, equal
rates of change .
SOURCE : U. S. Bureau of Mines .
slopes indicate equal
Similarly, distillate fuel experienced a reduction in the rate of growth in demand from
an annual rate of 10 per cent in the postwar
decade to a 2.3 per cent rate from 1956 to
1959. Consumption of this fuel, which is used
in diesel engines of trucks, buses, and railway locomotives and for heating private
homes, was accelerated by the displacement
of steam locomotives and the sharp increase
in the number of diesel trucks on U. S. highways after 1946. Since these transitions have
been largely completed, future gains may be
more moderate than the 1946-56 average. In
1946 no information was available on jet fuel
consumption. Since that information became
available in 1952, however, consumption has
12
increased by more than four times. While
kerosene is an important component of jet
fuel and has experienced increased demand
as a result of gains in consumption of that
fuel, other demands for kerosene have remained generally stable in the postwar period.
In contrast to these relatively rapid rates of
growth, demand for residual fuel oil increased
at an average annual rate of only 1.3 per cent
since 1946. A major reason for the relatively
slow rate of increase in consumption of residual fuel oil was the intense competition this
fu el faced from natural gas, since natural
gas is probably a better substitute for residual
fu el oil than for other refined p etroleum
products.
r11 broad perspective, the major change in
the composition of demand since 1946 has
b een the rapid rise in importance of the lighter end products. These high-value products
which include gasoline, kerosene, distillate
fuel oil, and jet fuel have assumed a greater
relative importance during this period as their
share of domestic demand for refined products has increased from 60 per cent in 1946
to 68 per cent in 1959. This shift in the composition of demand has had an important
impact on existing refineries and on new
plants in the industry.
Capital Expenditures and Additions to
Refining Capacity
Investment in the Petroleum Industry
In the light of changes in the structure and
growth of demand for refined products, it is
interesting to trace the capital expenditures
which have given rise to the present surplus
of refining capacity. After World War II,
plant and equipment expenditures for manufacturers of petroleum and coal products increased, reaching a peak in 1948 and subsequently declining for 2 years. Shortly after
the beginning of the Korean War in 1950,
plant and equipment expenditures were stimulated by high demand and the program of
in Petroleum Refining
the D efense Production Administration which
allowed accelerated amortization of new facilities. Expenditures for plant and equipment continued to increase after the end of
the conflict and reached a peak in 1957. Expenditures in 1958 were down sharply from
the year-earlier level and, although moderate
increases occurred in 1959 and the first two
quarters of 1960, anticipated expenditures for
1960 were still one fourth below the 1957
level. Nevertheless, recent levels of investment have been sufficiently large to support
continuing additions to basic refining capacity.
While increases in refining capacity are
certainly relat<•d to plant and equipment expenditures in the petroleum industry, tlw n'lationship is by no means simple or fixed. A
portion of investment outlays- the magnitude
of which may vary from time to time and is
not precisely known-goes for replacement. In
addition, capital expenditures by petroleum
companies are partly channeled into exploration, crude production, or distribution. In fact,
as a result of the high level of excess capacity
in the past few years, companies have indicated they are concentrating relatively more
of total capital expenditures on distribution.
Moreover, investment in new equipment motivated by efforts to reduce costs does not
necessarily result in capacity expansion.
In addition, the recent trend toward increased octane ratings for gasoline and higher
yields of light end products has required extensive investment aimed at increasing the
quality and yield of certain products but not
necessarily resulting in greater throughput
capacity. The basic distillation process involved in refining al1ows no opportunity for
varying the proportions in which the components of a given crude are divided, although
different crudes yield different proportions
of the various products. By means of cracking, however, the yield of the various components of crude oil can be modified to conMonthly Review •
October 1960
form more closely to demand. Cracking is a
means of increasing the yield and quality of
light fuels by breaking large molecules into
sma1ler ones. This accounts for the fact that
catalytic cracking capacity increased nearly
three times from 1946 to 1957 and reforming
capacity increased more than 21/~ times from
1954 to 1959. In contrast, thermal cracking
capacity has declined slowly since 1946 as
certain obsolete thermal processes have been
scrapped.
The modification, replacement, and expansion of capacity has, in recent years, taken
place at existing plants. As a result, most refin<'ri<'s consist of a conglomeration of old
a11d new equipment. In this light, it is interesting to note that, while total capacity was
expanded by almost 90 per ce11t during the
postwar period, the number of refineries in
operation declined by 20 per cent.
Additions to Capacity
It is apparent that inducements to invest in
refining plant and equipment have arisen
from the need to modernize plants, to develop
capacity for increasing the percentage yield
of light end products, and to replace aging
equipment. Nevertheless, as mentioned earlier, part of the investment by petroleum
companies in the last several years has taken
the form of increases in basic crt.de oil refining capacity.
Basic crude oil refining capacity is defined
by the U. S. Bureau of Mines as the maximum average throughput attainable with allowance for normal downtime for repairs and
routine maintenance. Total capacity is divided into both operating and shutdown components. Since operating capacity is more
sensitive to relatively short-term developmen ts than total capacity, it is more suitable
for the purposes of the article. Hence, subsequent referenc s to capacity will pertain to
operating capacity.
From January 1, 1946, to January 1, 1957,
crude oil charging capacity increased at an
13
Recent Adjustments
annual rate of 5.2 per cent. In the subsequent
3 years-despite low rates of utilization-capacity continued to increase at an annual rate
of 2.8 per cent. Thus, additions to excess
capacity have resulted from the sharply reduced rate of demand growth since 1956 combined with continuing additions to basic capacity.
Excess Capacity in Petroleum Refining
While refining capacity has clearly been
large relative to output in the last several
years, excess refinery capacity has existed virtually throughout the history of the industry .
1t has been common for expansion in capacity
lo he unclcrlakc11 , allho11gh existing <'apacily
was not being fully utilized . It is necessary
to have a cushion of excess capacity in industries such as petroleum refining in order
that short-run expansions in output may be
undertaken. In this way, petroleum refineries
are similar to steel mills. Plants in both industries are operated on a continuous 3-shift
basis. As a result, it is not possible to expand
capacity by working overtime or putting on
another shift. The two types of plants are
further similar in regard to the specialized
equipment required. Both require more capital per worker than the average manufacturing industry. Capital invested in petroleumincluding extraction and pipeline transportation-was a large multiple of the average for
manufacturing as a whole in 1957. In both
cases, existing capacity represents a rather
fixed ceiling to production which cannot be
raised in the short run by the substitution of
other productive factors. This is in contrast
to the manufacture of products which require
little specialized equipment, or where bottlenecks can be avoided by the su bstituti0n of
other factors for capital equipment. In addition to a cushion being required to meet possible short-run demand surges, anticipation of
continuing demand growth would likely lead
to some degree of current excess capacity.
14
While the need for a cushion of extra capacity appears clear enough, it may well be
asked what the normal or desirable magnitude of this cushion is likely to be. For the
first 11 years after World War II, crude petroleum inputs amounted to about 90 per
cent of operating capacity. During this period
the per cent of capacity in operation fell below the 11-year average three times- in 1949,
1950, and 1954, all years of reduced business
activity. If the average level of capacity utilization from 1946 to 1956 were considered
to he the goal of petroleum refineries as an
aggregate, utilization exceeding this level for
a period of time would stimulate r<'finers to
expand capacity. On the other hand , if utili zation fdl below this level for a significant
p eriod, additions to capacity would be discouraged.
If, then, the normal rate of capacity utilization is taken to be around 90 per cent, recent
rates have been below normal. In 1957,
capacity utilization was 89 per cent of the
potential and indications were that this level
was considerably higher than demand justified , as refined stocks piled up and at the end
of the year were 9 per cent higher than the
ycar-C'arli er level. In 1958, U. S. refin eries operated at 83 per cent of capacity. While this
was a year of recession, this rate of capacity
utilization was a low for the period since
Per Cent of Refining Capacity in Operation
Crude Oil Runs to Stills as a Per Cent of
Operating Capacity*
PE.R CENT CAPACITY IN OPERATION
100
90
80
1946
'48
'50
'52
' 54
'56
' 58
'60
* Capacity is calculated as of July 1 by averaging capacity at the
beginning and end of each year .
SOURCE: U. S. Bureau of Mines .
in Petroleum Refining
World War II-below even the rate of previous postwar recession years. The following
year the rate of capacity utilization showed
little improvement. In spite of the significantly increased level of excess capacity, further increases in capacity were made during
this 3-year period. In fact, while crude runs
to stills increased less than l per cent from
1956 to 1959, crude oil refining capacity increased more than 8 per cent from January
1, 1957, to January 1, 1960. These developments are, at least at first glance, contrary to
what might be expected. However, a variety
of fa ctors may help to account for the seemingly incongruous developments of the past
S<'V('ral y('ars.
An influence which woul<l contribute to increases in the industry's operating capacity
is the decision of an individual refinery to
expand capacity in an attempt to capture a
larger share of the market. Although it can be
concluded that the increase in total demand
has not kept pace with recent additions in operating capacity for the industry as a whole,
individual companies may have realized increases in their market share in line with the
capacity expansion undertaken. In addition,
the geographical distribution of new crude
discoveries combined with population shifts
have resulted in the construction of some facilities to take advantage of proximity to developing population centers and convenient
access to crude supplies. Also, modifications
are often necessary in refineries before crude
from a new source can be refined. This is a
result of the unique properties of various
crudes and would of course tend to raise investment if not capacity.
Decisions to expand operating capacity during 1957, 1958, and 1959 also may have in
Monthly Review •
October 1960
part resulted from the difficulties in gauging
the extent to which increases in demand since
1950 were a consequence of the Korean War
and the Suez crisis. These two influences
served to obscure changes in long-run trends
in demand for refined petroleum products.
The process of separating and identifying
short- and longer-term factors was further
complicated by the recession which folJowed
upon the stimulation of Korea and Suez.
Another factor which may be significant in
explaining the continued increases in capacity
is the fact that actual expansion in capacity is
usually not realized for some time after the
decision to expand is made. This lag may be
of substantial length in th e petroleum industry where e<1uipme11t is elaborate and produceJ. to custom order. It is conceivable that
at least some capacity increases planned in
late 1956 and early 1957 might not have been
completed until 1958 or 1959.
The latter two explanations for the continued increases in capacity in 1957, 1958,
and 1959 lead to the conclusion that a certain
period of time may be required for the industry to adjust to changing patterns in demand.
The most recent survey of refinery capacity
taken by the Bureau of Mines on January 1,
1960, indicates adjustments to excessive capacity may be under way. This is suggested
by the fact that refinery capacity under construction as of January 1, 1960, was at the
lowest level since 1945. Although the magnitude of capacity building on January l has
not been a particularly reliable indication of
the annual increase in operating capacity in
the past few years, the low level of capacity
construction supports the hypothesis that the
1960 increment to refining capacity will be
small.
15
New Construction
Plant and Equipment Outlays
45
BILLIONS OF DOLLARS
5 ·5
SEASONALLY
40
40
5.0
5.0
35
35
4.5
4 .5
30
30
4 .0
4.0
25
25
3.5
BILL IONS OF DOLLARS
BILLIONS OF DOLLARS
45
SEASONALLY
ADJUSTED
ANNUAL RATES
BILLIONS OF DOLLARS
5 5
·
ADJUSTED
3.5
RESIDENTIAL
~
2.0
20
20
3.0
15
15
1.5
~
1.5
10
1.0
*
1.0
PUBLIC
10
--- .. _...,_
PUBLIC UTILITIES
,/
~ ..... ._ • .....-
5
~
..................
TRANSPORTATION
..-v-
BUSINESS
ALL OTHER
.5
5
PRIVATE
.5
o .............................................~~_._..__._....__.........._.__.........J....._._...............................................__.__.
1953
'54
'56
'55
'57
'58
'59
1953
'60
'54
'55
'56
'58
'57
* CHANGE
*ANTICIPATED
District
and
States
Reserve
City
Member
Banks
Deposits
Country
Member
Banks
Reserve
City
Member
Banks
0
'60
IN SERIES
PRICE INDEXES, UNITED STATES
BANKING IN THE TENTH DISTRICT
Loans
'59
Index
Country
Member
Banks
Aug.
1960
July
1960
Aug.
1959
124.8
Consumer Price Index
(1947-49 = 100)
126.6
126.6
Wholesale Price Inde x
(1947 -49 = 100)
119.2
119.7
119.1
Prices Rec' d by Farmers
(1910-14 = 100)
234
238
239
Prices Paid by Farmers
(1910-14 = 100)
298
298
297
August 1960 Percentage Change From
TENTH DISTRICT BUSINESS INDICATORS
July Aug. July Aug. July Aug. July Aug.
1960 1959 1960 1959 1960 1959 1960 1959
Tenth F. R. Dist.
Colorado
Kansas
Missouri*
Nebraska
New Mexico*
Oklahoma*
Wyoming
+1
+4
+2
+12
-1
-2
t
+2
t
+7
+4
+13
+1
- 1
+4
+3
+3
t
+3
+17
-2
t
+1
+s
- 3
t
+1
- 1
+1
+3
+1
- 3
:j::j:
t
**
• ; ••··
+7
**
*Ten th District portion only.
t Less than 0.5 per cent.
16
- 1
+3
+6
+9
**
District
and Principal
Metropolitan
+12
+3
+3
0
+0
+4
+2
- 13
-1
Denver
+2
t
Wichita
- 4
Omaha
+10
:j:*
+3
+16
- 2
- 5
- 1
+3
Oklahoma City
,;,*
**
t
+ 2
Tulsa
+ 0
Year
to date
- 1
Kansas City
- 7
+3
** No reserve cities in this state.
Year
to date
Aug .
+10
+2
- 1
Percentage change-1960 from 1959
Areas
Tenth F. R. District
Value of
Department
Store Sales
Value of
Check
Payments
Aug.
- 5
- 11
+11
+2
+7
+2
+18
+2
+0
+3
+13
+3
0
0
+5
0
- 1
- 4
@FedFRASER