Oil Refinery Profits Have More than Tripled
in Past Year
Long Beach Press-Telegram
By Steve Raabe
Denver Post
September 29, 2005
The nation's oil refiners are marking up wholesale gasoline prices to
historically high levels, causing motorists to pay near-record amounts at the
gas pump.
Gasoline shortages from hurricanes Katrina and Rita have caused some price
spikes. But refiners' gross profit margins have been climbing steadily for the
past year, long before the hurricanes hit.
A Denver Post analysis shows that gross profit margins on gasoline at the
nation's refineries have more than tripled from about $7 a barrel in September
2004 to $22.77 on Tuesday.
Gross refining margins calculated by subtracting refiners' crude oil
purchase price from their wholesale gasoline selling price have been a key
contributor to huge increases in net profit for the biggest oil companies.
The nation's top five oil companies Exxon Mobil, BP, Royal Dutch Shell,
Chevron and ConocoPhillips own 42 percent of U.S. refining. Comparing the first
half of 2005 to the first half of 2004, net income increased 65 percent for
ConocoPhillips; 39 percent for Royal Dutch Shell; 38 percent for Exxon Mobil;
and 31 percent for BP. Chevron reported a 4 percent decrease.
In Southern California, the average price for a gallon of regular gasoline
is now $3.031, according to the Automobile Club of Southern California.
"It's very difficult for consumers to go to the gas pump and pay record high
prices for gas, and then open the business page and see where oil companies are
making record profits," said U.S. Sen. Mark Pryor, D-Ark., ranking Democrat on
a Senate consumer affairs subcommittee.
"My suspicion is that (refiners) are taking advantage of the American
public," he said. "We can't prove it yet, but that's my suspicion."
Energy analysts and economists say refiners have been able to increase
margins for two main reasons:
Limited refining capacity that can cause spot shortages of gasoline. When
supplies are short, prices and margins go up. "The refining margins are huge
right now," said Rich Gilbert, economics professor at the University of
California at Berkeley. "There isn't enough gasoline to go around."
Lack of competition in the refining sector. Big mergers that brought
together companies such as Exxon and Mobil, Chevron and Texaco, and Conoco and
Phillips have reduced competition.
Refiners say the high margins reflect gasoline supplies that were tight
before Hurricane Katrina and have since grown much tighter. Yet, throughout the
past year, refinery profit margins have climbed sharply compared to crude oil
prices.
Average gross margins have soared from $6.44 a barrel one year ago to $22.77
Tuesday, an increase of 254 percent, according to a price analysis by Bryant
Gimlin of Fort Lupton, Colo.-based Gray Oil Co.
During the same 12-month period, crude oil prices rose just 31 percent.
High refining margins and oil-company profits have sparked calls for
investigations of price gouging and anti-competitive practices.
On Sept. 1, during Hurricane Katrina, refinery gross profits hit record
levels of nearly $32 a barrel on gasoline sales, compared to historic margins
of $6 to $8 per barrel. The increase in the refining profit margin that day was
434 percent over the same day a year earlier.
The Federal Trade Commission has started a probe to determine if illegal
industry behavior may have led to gasoline price gouging after Hurricane
Katrina.
Political leaders are calling for enactment of anti-gouging laws to protect
consumers even though gouging is hard to define and even harder to
prosecute.
"The entire industry needs to be looked at under a bright light," said U.S.
Rep. Diana DeGette, D-Colo. "We can't have oil companies and refiners making
record profits at the expense of the national economy."
Consumers could see another round of gasoline price increases as damage from
Hurricane /P>
Suncor USA, operator of Colorado's only refinery, said the high margins are
a function of suppy-and-demand economics. As supplies tighten and demand
remains strong, prices rise. Major refiners such as Valero, BP, ConocoPhillips,
Shell and Chevron declined to comment for this article.
Gross refining margins are defined as the amount of money refiners make from
selling gasoline and other products, minus their costs for crude oil. The
refiners' net profits are lower than gross margins because of additional costs
such as operating expenses, payroll, marketing, distribution and taxes.
Large oil companies do not divulge net margins in their financial
statements.
"Margins are subject to complicated bookkeeping and can be very difficult to
unravel," said UC-Berkeley's Gilbert. "But when you see companies' stock prices
go up by 50 percent you know that the stock market think they are
profitable."
The Amex Oil Index, which reflects the stock prices of 13 of the world's
largest oil companies, is up 49 percent so far this year. By comparison, The
Dow Jones Industrial Average, which tracks 30 blue chips stocks, has dropped 3
percent so far this year.
"There's no question refining margins are up," said Steve Douglas, general
manager of supply and marketing for Suncor's refinery in Commerce City, Colo.
"But you've got to consider that the refining industry has been in a deep
trough for a number of years when margins were small or non-existent."
No new refineries have been built in the U.S. since 1976, and current high
margins reflect tight supplies of gasoline and other refined products, Douglas
said.
"We've gotten to the point where supply and demand are balanced on a
pinhead," he said. "If you get the smallest little upset in production maybe a
refinery down for a few days for maintenance it's going to cause prices to
spike because other refineries are already at peak production."
The supply-demand tightness exploded into shortage when Hurricane Katrina
shut down 10 Gulf Coast refineries that supply about 18 percent of the nation's
gasoline. Four of them remain closed and may not reopen for weeks or
months.
Supplies of gasoline are much tighter than crude oil supplies, and thus more
susceptible to volatility and price increases, Douglas said.
"There isn't currently a shortage of crude oil in the U.S.," he said. "But
on the production side, we're so close to capacity that shortages can happen
quickly and create price spikes."
Energy analysts say that while public scorn often is directed at gas-station
owners, the retailers survive on profits of just a few cents a gallon.
But the sharp increase in refining margins is a key reason that gasoline
prices at the pump reached record highs earlier this month.
"I try to keep a 10-cent (a gallon) margin. Sometimes I make it, sometimes I
don't," said Tom Greenlee, owner of a Denver Sinclair station. "If you're
looking for profits, I guess refiners are where you'd look."
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