Notoriously volatile, the oil-refining sector has enjoyed a rather sustained period of favorable margins that began in early 2003 and could extend well into 2005. Not surprisingly, many refiners, particularly the smaller independents, have strengthened their balance sheets and enhanced their credit profiles during this recent run. Since the early 1990s, industry consolidation has created a handful of very large, well-capitalized players that dwarf the remaining independents. Continued consolidation is possible, albeit at a more gradual pace than over the past decade, as smaller independent refiners attempt to gain scale to compete with larger independents and integrated oil companies. The continuous implementation of stringent environmental regulations since the 1970s has rendered many smaller refineries economically marginal at best or, in many cases, uneconomical. Since the 1980s, the number of U.S. operating oil refineries has shrunk to about 150 from more than 300. Strong demand growth during the 1990s and the current decade has placed considerable pressure on refining capacity to keep pace.
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