Last week, as supply shortages sent the price of a gallon of gasoline as high as $6 in some markets, federal officials charged with protecting consumers quietly approved yet another oil industry merger, this one creating the nation's largest oil refiner.

Because of the rush of Katrina news, the merger earned hardly a mention in the general press. And yet by giving its blessing to Valero's $8 billion purchase of Premcor, the Federal Trade Commission not only reinforced its reputation as a patsy for the energy industry but demonstrated a stunning lack of political sensitivity.

Although the FTC and its staff never seem to make the link between industry consolidation, rising energy prices and record profits, Wall Street investors surely can. Over the past year, shares in Valero are up 226 percent, which, as the Financial Times pointed out last week, makes Google (only 186 percent) look like a laggard.

Listen to what Valero's chief executive, Bill Greehey, had to say Thursday in announcing that the deal had closed: "We are in a new era for refining where I believe you will continue to see higher highs and higher lows for both product margins and sour crude discounts. And now, with 18 refineries, no one is better positioned to benefit from this than Valero."

Translation: This deal will do nothing for consumers, but it's a home run for investors.

Here's the situation, as far as I can make it out. Refineries in the United States produce about 18 million barrels of refined product a day for an economy that consumes about 21 million. A completely new refinery hasn't been built in this country in nearly 40 years. And although Valero and others have spent $47 billion over the past decade to expand existing capacity by 13 percent, demand has grown even faster.

The reason that supply has not kept up in this industry, as in others, is simple: The industry makes more money that way. And one way the industry is better able to enforce this gentleman's agreement against investing too heavily in new capacity is by reducing the number of players and making entry into the industry even more difficult than it is already.

The FTC uses a different analysis. Its staff finds no evidence that this merger -- or any of the dozens of others they have approved -- gives the acquiring companies the power to raise prices. After all, even with this latest refinery deal, no company controls more than 13 percent of the national market nor more than 20 percent in any region.

But that analysis misses the point. As long as the industry can coordinate its investments, keep supplies tight and free-ride on OPEC price fixing, there is no need to unilaterally raise prices. In the mismatch of supply and demand, the "free" market does it for them.

The industry likes to explain away the lack of adequate refining capacity by arguing that government regulation makes building a refinery virtually impossible. The last time we heard the "government regulation" excuse, it was from Vice President Cheney during the California energy crisis. It turned out our energy-maven vice president didn't know what he was talking about, and that the real reason for skyrocketing prices was that Enron and the others were secretly manipulating the market by strategically withholding supply.

In the case of oil refineries, there's no doubt that, given voters' natural antipathy to having a refinery in the neighborhood, finding a new site requires much time, money and patience. But when President Bush floated the idea last year of speeding site approval by locating new refineries on inactive military bases, Valero's chief operating officer declared he wasn't interested. When you look at industry rates of return, he told The Post's Justin Blum, it's just not worth it.

This is the oil industry's other Big Lie. Every year, Fortune Magazine, in its Fortune 500 issue, calculates the rate of return on shareholder equity for each major industry. Last year, when oil prices were a lot lower than they are now, the average return for both independent refiners and integrated majors was 23.9 percent. This year, it's been even higher. And over the past decade, according to Fortune, the return on equity in the sector has averaged 16 percent, well above the investment hurdle rates in most other sectors of the economy.

Valero is a great company and a real success story. Since 1997, it has bought up lots of lousy refineries, fixed them up and run them right -- in the process adding the equivalent of two refineries' worth of new capacity. Essentially, it has put the lie to the self-serving complaint from the integrated majors that there was no money to be made from refining and from other downstream operations.

But what the country needs isn't a bigger Valero -- it's more Valeros, challenging the majors, investing heavily in new capacity and competing for market share. By approving the merger with Premcor, the FTC has reduced the chance of having that kind of full-throttle competition in an industry that desperately needs it.

Steven Pearlstein will host a web discussion at 11 a.m. today at washingtonpost.com. He can be reached at pearlsteins@washpost.com.