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Refiners Enjoying Bigger Profits
LA Times
By Elizabeth Douglass and Tanya Caldwel
April 15, 2006

As more Californians face $3-a-gallon gasoline, state refiners are making twice as much money as they did at the beginning of the year, state figures show.

Amid growing worries about summertime fuel supplies, California's average price for self-serve regular hit $2.91 a gallon Friday and could surpass $3 in the next few weeks, AAA said. Santa Barbara and San Luis Obispo already are posting averages above $3 a gallon, the automobile group said.

But don't blame crude oil. From early January to April 10, the cost of the oil most popular with California refiners rose 16 cents a gallon, while retail pump prices jumped 60 cents, according to the California Energy Commission. As a result, refinery gross profits have doubled in that time.

It should come as no surprise that refiners are making lots of money; after all, Exxon Mobil Corp. posted more profit in 2005 than any corporation in history. The trend, it appears, is continuing.

"Refiners are probably making as much in April as they made in entire second quarters in the past," said Tom Kloza, chief analyst at the Oil Price Information Service. Fear about summer fuel shortages have driven up prices across the country, he said, and refiners "are absolutely the beneficiaries."

Joseph Sparano, president of the trade group Western States Petroleum Assn., insisted that rising crude oil prices were the primary culprit behind rising gasoline prices in California and elsewhere.

Some consumers aren't convinced.

"I think they're just taking our money," said Talethia Moore, who put $20 worth of gas in her red Chevy Cobalt at a Chevron station in South Los Angeles on Friday. "People have to work hard for a living and they're making billions and billions of dollars…. No excuse makes sense to me."

Crude oil costs account for at least half of the pump price. On Thursday, the U.S. benchmark grade rose 70 cents to $69.32 a barrel on the New York Mercantile Exchange, which was closed for Good Friday. The highest closing price was $69.81 a barrel, reached Aug. 30.

"In a short period of time, it's market factors, not business practices, that are responsible for the changes we see in the price of gasoline," Sparano said.

Representatives from BP and Chevron Corp., California's two largest fuel retailers, did not return calls for comment Friday.

Figuring out profits from California operations can be tricky because the refiners don't reveal them.

The California Energy Commission approximates local refinery profits by taking the average retail price for gasoline sold under major brand names and subtracting the cost of the Alaskan North Slope oil used by refiners, as well as taxes and distribution and marketing costs. The resulting gross profit margin includes some other underlying expenses. Still, it is considered by many energy experts to be a good indicator of how much refiners are earning because such costs don't change significantly over short periods.

On Jan. 2, the refinery profit margin was 30 cents a gallon, according to the energy commission. On April 10, the most recent figure available, the margin rose to 63 cents a gallon.

California's current fuel stockpile is only slightly below year-ago levels, and recent production at the state's refineries has not been interrupted by unplanned shutdowns, the commission's weekly reports show.

"These numbers prove it's not the rising cost of crude that's driving the price at the pump, it's the opportunism of the oil companies to seize on any change in market conditions to push up the retail prices disproportionally," said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, a Santa Monica group critical of the oil industry.

"This is what happens when you have a free market where oil companies are free to charge whatever they want regardless of what their costs are," Court said.

John Felmy, chief economist at the American Petroleum Institute, said the California commission's method for measuring profit margin was flawed. Several expenses that are not subtracted from that figure have increased recently, including the cost of buying ethanol and other chemical additives used to produce gasoline, he said.

"It's clear there may be some cost issues and so on that don't appear in these so-called simple calculations," Felmy said.

A clearer profit picture will emerge the week of April 24, when most oil companies report their earnings, he said.

In addition to the higher cost of crude oil, several factors are pushing up gasoline prices, Felmy said. Some large refineries in the Gulf Coast have yet to return to full fuel production, and others were forced to undergo lengthy annual tune-ups because of disruptions caused by hurricanes Katrina and Rita last year.

In addition, large East Coast cities are making an unexpectedly abrupt change to gasoline blends that use ethanol in place of the additive MTBE, or methyl tertiary butyl ether. The shift has energy futures traders worried about temporary fuel shortages as refiners work to secure enough ethanol and get it to the right markets in time for the summer driving season, which begins Memorial Day.

Ethanol advocates have said their industry will respond to the refiners' needs, and that they are not to blame for high gas prices. What's more, California has been using ethanol in its gasoline for two years, and should see little or no ethanol-related problems, oil analyst Kloza said.

That may be little comfort to drivers like Renee Miller, who on Friday paid $2.93 a gallon for gas at a South Los Angeles Arco.

Miller, a Norwalk resident, said she was filling her Nissan Xterra while out on business, helping her hearing-impaired clients find jobs. Miller's employer reimburses her a set amount for work mileage, "but now that the prices are so high, I'm actually losing money," she said.

Such costs take a toll, Miller said, because "I'm a single mom and I'm getting married in two months, so I've got to watch my money."

Gasoline demand might dip in reaction to high prices, Kloza said. "The annoyance threshold is going to be exceeded in the next few weeks."

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