While drivers are facing sticker shock at the pump these days, here is
a bigger shock: high prices are putting a strain on oil refiners.
After last year’s stellar profits, American refiners are going through
a traumatic period. In a time of record gasoline prices, some of them
actually lost money in the first quarter, and for virtually all
refiners, profits are down sharply.
Experts say the refiners are caught in a double bind. The price of
their raw material, oil, is rising because of strong global demand. At
the same time, consumption of gasoline in the United States is falling
as a result of slower economic growth and consumer efforts to conserve.
However much the companies would like to raise gasoline prices enough
to pass along the full increases in oil, analysts say they have been
unable to do it. Oil prices doubled in the past year, while wholesale
gasoline prices rose a mere 39 percent.
“Refiners are having a terrible time,” said Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation.
For decades, global oil prices were tightly coupled to the ups and
downs of the American economy. But in recent years, world oil prices
have been pulled upward by heavy demand for diesel fuel from developing
countries like China. American economic growth weakened in the last few
months, but that has mattered little in the upward march of oil prices.
“What we see at the gasoline pump is increasingly driven by what is
happening elsewhere in the global economy,” said Daniel Yergin, the
chairman of Cambridge Energy Research Associates, a consulting firm.
Gasoline prices rose on Tuesday to a nationwide average of $3.73 a
gallon, according to AAA, the automobile club. That is yet another
record. Diesel prices also set a record, at $4.39 a gallon. Crude oil
futures closed at $125.80 a barrel, up $1.57, or 1.3 percent, on the
New York Mercantile Exchange.
In its latest monthly report, the International Energy Agency, an
adviser to industrialized countries, reduced its forecast for global
oil demand for this year, as consumption drops by a
bigger-than-forecast 300,000 barrels a day in the developed world.
But that decline will be more than offset by growth from developing
countries. Consequently, global consumption is expected to rise this
year by 1 million barrels a day, to 86.8 million barrels a day. Nearly
all that growth will come from China, the Middle East and Russia.
In the United States, there is no longer much doubt that consumers are
responding to higher fuel costs by driving less. Oil consumption fell
by 3.3 percent in March, compared with March of last year.
But even as gasoline demand softens, the price keeps rising, driven by
higher oil prices. The cost of oil represents about 75 percent of the
price of gasoline at the pump, according to the Energy Department;
state and federal taxes account for 12 percent, and refining and
distribution make up the rest.
The rising oil prices have led to a sharp drop in refining profit
margins, or the difference between the cost of oil and the cost of
gasoline. These margins, at $12.45 a barrel on average, are 60 percent
below their year-ago level, and in the lower half of their five-year
range, according to a report by UBS.
In response to falling gasoline demand and rising costs, refiners have
cut their production rates. Refining utilization rates, for example,
slumped to a low of 81.4 percent in the second week of April, compared
with 90.4 percent at the same time last year. Earlier this month,
refineries were running at 85 percent of their capacity.
All this has translated into a tough quarter for some refiners. While
large integrated companies, like Exxon Mobil, reported big profits in
the first quarter thanks to their oil sales, smaller independent
refiners that buy their oil, instead of producing it themselves, have
been losing money.
Tesoro, Sunoco, and United Refining all posted losses in the first
quarter. The hardest hit have been small refineries that tend to
process the most expensive types of crude oil into gasoline. Sunoco,
for example, lost $123 million in the first quarter, while Tesoro
posted a $82 million loss for that period, in contrast to a profit of
$116 million last year.
“We’re just not able to pass along the increased cost of crude oil on
the gasoline side,” said Lynn Westfall, the chief economist at Tesoro.
At Valero, the nation’s largest independent refiner, first-quarter
profit melted by 76 percent. Its refining capacity allows it to process
heavier grades of crude oil that typically trade at a discount. Still,
its profit dropped to $261 million in the first quarter compared with
$1.1 billion last year.
Some consumer advocates say they are deeply suspicious about the
behavior of refiners who are sharply cutting production at a time of
record gasoline prices.
“They are not sitting in a boardroom and colluding, but they can see
easily enough where their benefit lies, and it doesn’t lie in a price
war,” said Judy Dugan, the research director at Consumer Watchdog. “In
a truly competitive market, you might see some of these providers try
to improve their market share by reducing prices. But this is not
happening. They are all better off by restricting production to keep
Mark Cooper, director of research at the Consumer Federation of
America, said mergers in the 1990s had cut the number of refiners in
the country and contributed to reduced competition in the refining
“We let them accumulate market power through the wave of mergers, and
we’ve been paying the price in the last five years,” he said. “If there
is a small number of players in the market, they learn from each
The demand for diesel has been one of the main drivers of oil demand in
recent years. Diesel and other so-called middle distillates are used as
transportation, power generation and industrial fuels.
In China, for example, oil imports have surged in recent weeks, a
signal that the government is stockpiling oil and diesel in
anticipation of the Olympic Games. Beijing, the International Energy
Agency report said, is seeking to avoid a repeat of the embarrassing
fuel shortages and power disruptions that plagued the country last
The federal Energy Information Administration on Tuesday projected the price of regular gasoline, now averaging $2.96 a gallon nationwide, will hit a monthly average near $3.40 by spring.
The prediction of higher prices comes even as the economy is slowing, which could weaken energy demand and cause prices to soften. But the federal agency is predicting that petroleum supplies will be tight enough to push the national average gas price past the record, which AAA says was $3.23 a gallon, set last May.
Moreover, an unusually high number of refinery outages or other disruptions could push prices even higher.
"Volatility is part of the picture," said Neil Gamson, an analyst for the Energy Information Administration.
Prices could ease somewhat after the spring surge, but they’re still expected to average about 26 cents a gallon more this year than the $2.81 average during 2007.
The federal energy agency’s longer-term forecast is for gas prices to average $3.08 a gallon in 2009.
Higher crude oil prices have kept gasoline prices up over the winter, when they normally decline. A year ago, a barrel of West Texas Intermediate crude was selling for $57.81. On Tuesday, a barrel cost $93.16.
A lesson in the volatility of the oil market came in recent days, when Venezuelan President Hugo Chavez threatened to stop oil shipments to the U.S. Though observers don’t expect him to entirely cut off the U.S., on Tuesday Chavez said he would suspend sales to Exxon Mobil.
"Chavez was able to raise oil prices enough that it could cause gas prices to rise 10 cents a gallon," said James Williams, an economist for WTRG Economics, which tracks energy prices.
With crude oil prices around $90 the last few months, it could have been worse at the pump for consumers. But the rise in oil prices roughly coincided with a collapse in refinery margins, which is the difference between the price of West Texas Intermediate crude and wholesale gasoline.
At one point last spring, the refineries’ take was more than $1 a gallon. This winter, the refinery margins have been below 10 cents a gallon, in part because of the season’s lower demand for gasoline.
But if oil prices remain high when refinery margins rise again, higher gasoline pump prices are assured. That’s what federal energy officials believe will unfold over the next few months.
That outlook is not embraced by everyone.
A recession, if it happens, would weaken demand for gasoline — demand that is already flat in the U.S. A recent government report showing rising inventories led Societe Generale, a French investment banking firm, to say that it could trigger a "breakout to the downside."
Lewis Adam, president of Admo Energy in Kansas City, which helps companies manage their energy price risks, said he believed gas prices were set to rise — but there is no guarantee.
"I just don’t think it’s a certainty," he said.
But some consumer groups are convinced prices are set to spike – and that Big Oil will do whatever it takes to curtail supplies to ensure higher prices.
Such fears were stoked recently when Tesoro Corp., which has refineries in the western U.S., said it was scaling back production because of weak refinery margins.
"It’s almost impossible that prices wouldn’t go up," said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif.
Bill Klesse, chief executive officer of Valero Energy Corp., the nation’s biggest refiner, believes those margins will go up simply because of natural market conditions.
Despite mounting fears of recession in the U.S., worldwide demand for fuel will be up, Klesse said, noting that some other countries are increasing their imports of gasoline. The amount of time that refineries will be down for maintenance also is likely to be more than is expected. And the inventories will decline as that maintenance continues over the next few months.
The result, he recently told analysts and investors gathered for an industry conference in Vail, Colo., is a market not unlike what it was a year ago, when gasoline refinery margins began to rise.
"We just see the fundamentals as still good," Klesse said.
For companies like Valero, refining margins can be even higher than they appear. Valero and many other companies have upgraded their refineries so they can handle heavier, "sour" grades of oil, which cost less than better grades such as West Texas Intermediate. Gasoline refined from the cheaper crude sells for just as much wholesale, though, leaving fatter margins for the refiners who can use cheaper crude.
In fact, a majority of oil used by U.S. refineries now is the cheaper, heavy-sour grade.
James Gibbs, the head of Frontier Oil Corp., which owns refineries in Kansas and Wyoming, said in a recent conference call with analysts that the company had bought Canadian oil in January that was less than half the cost of West Texas Intermediate.
"We’re going to make money because we’re going to run every barrel of Canadian crude we can get our hands on," he said.
To reach Steve Everly, call 816-234-4455 or send e-mail to firstname.lastname@example.org]]>
October 19, 2007
CONTACT: Judy Dugan, 310-392-0522 x305
Santa Monica, CA — Rudy Giuliani is far ahead of the rest of the
presidential pack in contributions from the oil and gas industry,
netting $536,708 to date, more than the total of the next two top
recipients, Mitt Romney at $291,033 and Hillary Clinton at $211,043.
"With the price oil heading toward $100 a barrel and prices at
the pump headed back to $3.00 a gallon, politicians should be treating
Big Oil’s contributions as dirty money," said Judy Dugan, research
director of OilWatchdog.org and its parent organization, the Foundation
for Taxpayer and Consumer Rights. "Americans can’t afford politicians,
especially a president, indebted to the oil industry."
The contribution data, from election watchdog OpenSecrets.org,
shows the oil and gas industry giving nearly $1.5 million to the
industry’s top five recipients, also including John McCain and Bill
Richardson. Richardson is governor of New Mexico, an oil producing
state. (See more candidate contributions on front page of www.OilWatchdog.org.)
Giuliani, however, has the closest ties to oil industry figures, developed since he was mayor of New York.
His law firm, Houston-based Bracewell & Giuliani, has
lobbied Texas legislators on behalf of Citgo Petroleum Corp., a
Texas-based oil company ultimately controlled by Venezuelan President
Hugo Chavez. The firm also has worked on behalf of Saudi Arabia’s oil
ministry in a Texas court case, and its other legal clients include
ChevronTexaco; BMB Munai, a developer of oil wells in Kazakhstan, and
Statoil, a Norway-based oil and gas conglomerate.
Giuliani Partners, the former mayor’s consulting business
co-founded with Texas GOP fund-raiser Ray Bailey, held contracts to
advise Entergy (a leading U.S. nuclear power plant operator) and
Broadwater Energy, which hopes to build a liquefied-natural-gas
terminal in New York’s Long Island Sound. Oilman T. Boone Pickens is a
Giuliani fund-raiser. A Time Magazine article in March called Giuliani
an "honorary Texas oil lawyer."
Valero Energy, the largest North American oil refiner, has been
a client of Bracewell & Giuliani and gave more than $14,000 to
Giuliani’s campaign. And Giuliani has advised TransCanada Corp. and
Shell Oil Co. on a plan to place a 1,215-foot-long barge on Long Island
Sound to store liquefied natural gas.
(Click here for sources and more details.)
In just the last quarter, Giuliani received more than $10,000,
according to Federal Election Commission data, in donations linked to a
Swiss-based oil refiner, Petroplus, that has been expanding rapidly.
The industry’s resistance on climate change, indifference to
renewable fuels and profiteering at the gas pump has put oil money in
the same class as tobacco money," said Dugan. "Returning these
contributions would be the best signal by any candidate that he or she
is really on the side of the consumer and the environment."
– 30 –
Chevron, BP and Valero Energy have warned that their third-quarter profits will be under those of the last quarter because their refining profits have deflated from stupendously piggish highs. Unfortunately, they and other oil companies are doing all they can to correct the situation. A web financial-analyst report filled with mind-numbing charted data sums it up:
"Lending further support for a rebound in refining stocks is the fundamental pictures of supply and demand. Gasoline production is declining precipitously and is below last year’s levels as refinery utilization rates have fallen from a high of 92% in August to 87.5% currently.
"The falloff in demand with the end of the summer driving season is stabilizing while at the same time additional supply coming from imports is falling. With falling production, falling refinery utilization rates, falling imports, and stabilizing demand, it’s no wonder that U.S. gasoline stockpiles are well below the average for this time of the year."
That "rebound," then, would be induced by a deliberate reduction in refining and gasoline supplies, even as U.S. pump prices linger at nearly 50 cents above last year’s price at this time.
Oil prices are at historic highs, with analysts stumped for any real-world explanation beyond irrational unregulated market trading. On top of this, oil companies will do all they can to regain the near $30-a-barrel refining margin that drove new profit records across the board in the second quarter.
Homeowners in cold climates may suffer even more than motorists. The federal Energy Information Administration yesterday predicted that the cost of heating oil (also a refined product) will jump 22% this winter. In New York, that’s on top of heating oil prices that are already at record highs.
The other heating fuels, natural gas and propane, are predicted to rise 10% and 16% respectively.
Has anyone given a thought to what that will do to homeowners whose adjustable mortgages already have them on the edge of insolvency? In California, maybe not much. But in Chicago, Buffalo and Boston, an extra $100 or $150 a month adds major stress to a mortgage rising by hundreds more.
The Houston Chronicle (Texas)
August 31, 2007
by Brett Clanton, Houston Chronicle
Soaring gasoline prices this spring and summer may have pinched
drivers, but they helped U.S. oil refiners rack up huge quarterly
profits and extend a hot earnings run that began several years ago.
Refining profits for 22 of the largest energy companies jumped
more than 20 percent to $11.8 billion in the April-to-June period this
year compared with 2006, according to the U.S. Energy Department’s
Energy Information Administration.
That’s nearly double their second-quarter profits three years
ago, and a record since at least the first quarter of 2000, when the
Energy Information Administration began regularly compiling the profit
Recently, however, a drop in a closely watched indicator of
refiner profitability has spurred questions about how much longer the
industry’s winning streak will last.
The difference between what refiners pay for a barrel of oil
and the selling price of gasoline and other fuels made from it is known
as the gross refining margin. That spread, calculated before taxes and
expenses are subtracted, has narrowed sharply in recent weeks.
After averaging a record $27.65 per barrel in the second
quarter, the margin is about half that level today, said Eitan
Bernstein, industry analyst with Friedman, Billings, Ramsey & Co.
in Arlington, Va.
"The second quarter was great for refining margins," he said. "Third quarter? Not so much."
Refining margins tightened partly because higher crude prices
have made gasoline more expensive to make. Also, many refineries that
were down this spring for unplanned outages have returned to
production. That put more gasoline on the market, reduced the need for
imports and weakened the price that refiners
— and ultimately gas stations — can charge for it.
The average price for gasoline was $2.75 a gallon Monday, down
3.6 cents from a year ago and the lowest since April, the Energy
Department said in a weekly report.
But a separate Energy Department report showing a
sharper-than-expected drop in the nation’s gasoline supplies last week
sent crude and wholesale gas prices up, and may put renewed pressure on
pump prices, the department said.
It’s common for margins to fall this time of year as gasoline demand cools at the end of the busy summer vacation season.
Yet the suddenness of the collapse this year has caught industry
observers by surprise, prompting speculation about what else may be
Some blame a pullback by financial players in the gasoline
futures market, who were drawn to the industry’s strong run in recent
years but were spooked when margins began to soften. Others suggest the
market is anxious about proposed increases to auto fuel economy rules
and biofuel mandates, both of which could cut into gasoline demand and
make refineries less profitable.
"There’s plenty of room for those who are optimistic and for
those who are pessimistic to have their say," said Fadel Gheit, energy
analyst with Oppenheimer & Co. in New York.
Yet he believes the short-term outlook is strong for refining
profits, noting that despite the recent drop, margins remain more than
20 percent higher than their five-year average.
The earnings and stock prices of refiners have skyrocketed in
the last few years as demand for gasoline and other petroleum products
has grown faster than the industry’s capacity to produce them. This era
of record profits, which follows many lean years for the industry, has
been called the golden age of refining.
In the second quarter, the run continued as refinery outages
and higher-than-usual demand pushed pump prices above $3 a gallon
Chevron earned $1.3 billion in profit from its refining and
marketing operations in the second quarter, a 30 percent improvement
from $998 million last year. Exxon Mobil, Royal Dutch Shell and
ConocoPhillips also saw gains in U.S. refining operations.
Independent refiners — companies that make gasoline and other
products but do not pump oil and natural gas from the ground — fared
San Antonio-based Valero Corp., the nation’s largest refiner,
earned a record $2.2 billion in the second quarter, up from $1.9
billion a year ago. Tesoro Corp, also of San Antonio, posted record
quarterly earnings as well. So did Dallas-based Holly Corp. and
Houston’s Frontier Oil Corp.
"It’s our view that the golden age of refining is not over," said Doug Aron, Frontier’s vice president of corporate finance.
But the big profits prompted backlash from consumers and
politicians who charged the industry with manipulating the market for
its own gain.
"These increases have happened quarter after quarter since
Hurricane Katrina, giving U.S. drivers higher-than-hurricane prices
without a natural disaster," said Judy Dugan, research director of
Santa Monica, Calif.-based consumer group Oilwatch.org, in a report
Dugan and other industry critics have called for investigations
of this year’s refinery outages and for stronger government oversight
of refinery maintenance and production.
Charlie Drevna, executive director of the National
Petrochemical and Refiners Association in Washington, said that is
unnecessary. The refining industry already is shelling out billions to
comply with federal regulations, and is experiencing more outages this
year in part because those rules are so onerous, he said.
He also dismisses the idea that refiners would deliberately
shut down facilities at a time when refining profits are near record
levels. That "just doesn’t make economic sense," he said.
Refining margins have rebounded a bit in recent days, but still
are unlikely to be as high in the second half of the year as the first,
said Peter Beutel, analyst with Cameron Hanover.
However, an active Gulf Coast hurricane season or a sudden change in the national economy could change that, he said.
Contact the author at: email@example.com
His law firm, Houston-based Bracewell & Giuliani,has lobbied Texas legislators on behalf of Citgo Petroleum Corp., a Texas-based oil company ultimately controlled by Venezuelan President Hugo Chavez. The firm also has worked on behalf of Saudi Arabia’s oil ministry in a Texas court case, and its other legal clients include ChevronTexaco; BMB Munai, a developer of oil wells in Kazakhstan, and Statoil, a Norway-based oil and gas conglomerate.
– USA Today, July 17, 2007
Giuliani Partners, the former mayor’s consulting business co-founded with Texas GOP fund-raiser Ray Bailey, "signed contracts to advise such security-conscious businesses as Entergy (a leading U.S. nuclear power plant operator) and Broadwater Energy (which hopes to build a liquefied-natural-gas terminal in New York’s Long Island Sound). With the other hand, the company began reaching out to such key Bush supporters as oilman T. Boone Picken." It was Bailey’s ties that turned the Texas law firm Bracewell Patterson into Bracewell & Giuliani. These ties earned Giuliani the moniker, "honorary Texas oil lawyer."
– Time Magazine, March 22, 2007
Valero Energy, the largest refiner in North America, has been a client of Bracewell & Giuliani and gave more than $14,000 to Giuliani’s campaign.
Giuliani received $48,000 from Shell Oil Co. for a speech in March 2006.
(Candidate financial disclosure form)
Giuliani is advising TransCanada Corp. and Shell Oil Co. on a plan to place a 1,215-foot-long barge on Long Island Sound to store liquefied natural gas.
– Bloomberg April 30, 2007]]>
All Things Considered (National Public Radio)
May 7, 2007
by ANCHORS: MICHELE NORRIS, ROBERT SIEGEL – REPORTER: SCOTT HORSLEY
The following program was broadcast on NPR’s All Things Considered radio program on Monday, May 7th, 2007. Listen to the audio of the program here.
MICHELE NORRIS, host: From NPR News, this is ALL THINGS CONSIDERED. I’m Michele Norris.
ROBERT SIEGEL, host: And I’m Robert Siegel. The Energy Department released its weekly survey of gasoline prices this afternoon. And for the first time this year, the average price for unleaded regular has topped $3 a gallon, $3.05 to be precise.
It’s not the cost of crude oil that explains the $3 signs going up at gas stations around the country, as NPR’s Scott Horsley reports, most of the extra money drivers are paying these days is going to refiners.
SCOTT HORSLEY: This isn’t the first time drivers have seen $3 gas. Prices briefly climbed that high after Hurricane Katrina, and again last summer. But AAA spokesman Jeff Sundstrom says familiarity doesn’t make the high prices any easier to take.
Mr. JEFF SUNDSTROM (Spokesman, American Automobile Association): It’s unpleasant for everyone to pull up the gas pump and have to put $40 or $50 worth of gasoline in their tank, and I think there is a concern for the overall economy when gas prices get this high.
HORSLEY: The reason gas prices are climbing is the nation’s refineries aren’t making enough. According to the Energy Department, refineries operated at just 89 percent of capacity in the month of April; their second lowest level for that month in 10 years. Like a drought-stricken city draining its reservoir during what should be the rainy season, the nation has been forced to tap its gasoline stockpiles this spring, leaving them well below average with the busy summer driving season still to come.
Gasoline production has been limited by a series of refinery shutdowns, some for planned maintenance, others because of accidents. Energy analyst Philip Verleger worries that high prices last year may have caused refiners to overwork their facilities, setting the stage for more trouble this year.
Mr. PHILIP VERLEGER (Energy Analyst): When one sees very high margins, there’s every incentive to push the refinery to make as much gasoline as possible. Obviously, if you push a facility too hard you also increase the risk of an accident.
HORSLEY: Verleger says refiners have also been challenged by requirements for cleaner-burning fuel, and by a shortage of skilled workers.
Mr. VERLEGER: In one sense, the refiners are paying the price now for the fact that they laid off so many workers in the ’80s and the ’90s when margins were not so good.
HORSLEY: But consumer advocate Jamie Court of OilWatchdog.org sees a more sinister explanation. He compares this year’s string of refinery shutdowns to the California electricity crunch six years ago, when some power-plant operators deliberately idled plants in order to drive up the price.
Mr. JAMIE COURT (Consumer Advocate, OilWatchdog.org): When oil companies aren’t being watched, and when there’s no legal bar for them to close down refineries so they can jack up the price of gasoline, they’ll do it, and there’s nothing we can do.
HORSLEY: Whatever the explanation, refiners have been enjoying outsized profits. The nation’s biggest refiner, Valero, for example, made less gasoline in the first quarter than it did a year ago. Because each gallon was worth more, Valero’s profits surged by 29 percent.
AAA’s Sundstrom says from a driver’s perspective, politicians need to rethink the nation’s energy policy.
Mr. SUNDSTROM: The reality is for many Americans driving is not a discretionary activity. They have to get to and from work. They’ve got to get their kids to school. They need to get back and go to the grocery store. So they may simply be cutting back on their purchases of other products and services and still buying the gasoline they need.
HORSLEY: A month ago, the Energy Department predicted gasoline prices would be lower on average this summer than last. But AAA warns, pump prices may climb even higher before they start to go down.
Scott Horsley, NPR News.
Business Week Online
May 3, 2007
by Moira Herbst
Fires. Explosions. Lightning strikes. This is the new state of affairs for U.S. oil refiners, hobbled in recent months by an unprecedented plague of bad luck and operational setbacks from California to Delaware [see BusinessWeek.com, 4/26/07, "$4 Gas? Fat Chance"]. Facilities of all sizes and age have been struck, leading to supply bottlenecks in various regions.
On May 2 the Energy Dept. reported that refineries are operating at only 88.3% of capacity, barely above the 20-year low notched last week. Not surprisingly, gasoline inventories dropped for the 12th week in a row — the first such three-month stretch since 1993. All that has set gasoline prices on a dramatic bull run, with refiners’ stocks setting all-time highs and U.S. consumers facing average pump prices of $2.98.
What’s gone so wrong in refining?
"They’re cursed," says Phil Flynn, an analyst with Alaron Trading in Chicago. "You can argue that the refineries are old and they’re squeezing more blood from the turnip than ever, but that explanation doesn’t cut it. Maybe Al Gore has cast a spell on the industry."
Conspiracy theories aside, a number of factors are preventing more supply from flowing into the U.S. market. The overall picture is a system under such strain that any outages or disruptions ricochet quickly into retail prices. Because of high costs and a lack of public support, refiners haven’t built an entirely new plant since 1976. While they’ve been expanding existing plants, the industry isn’t keeping pace with growing demand. Any additional stresses — hurricanes such as Katrina or the persistent power outages — curb output. Add to that a shortage of skilled workers and government rules mandating cleaner fuels, and the reasons behind scarce supplies emerge.
But while production hiccups may be an operational curse, refinery shareholders are now pondering a different question: What’s gone so right with refining?
The price difference between a barrel of crude and a barrel of refined gasoline are now the fattest the industry has ever seen. With gasoline for June delivery priced at $93.37 May 2 on the New York Mercantile Exchange, margins have reached $30 per barrel, according to calculations by both Chicago-based consulting firm Oil Analytics and Peter Beutel of Cameron Hanover Associates. That’s 50% higher than last year, when margins at the time hit historic highs of $20 a barrel, according to Oil Analytics. "Refiners are making a bundle now," says Beutel.
The steep margins led to Valero’s Apr. 26 announcement that first-quarter profits were $1.1 billion, up a stunning 30% over last year; Chevron (CVX) reported first-quarter earnings of $4.7 billion, up 18% from last year. ExxonMobil (XOM) saw a 10% jump in quarterly net income, at $9.3 billion — the company’s best-ever first quarter. For integrated oil companies, the results are from one factor: high refining margins. The segment of Exxon’s business that includes refining, for example, earned $1.9 billion for the quarter, up $641 million from the year before.
The profits led to all-time closing highs last week for the shares of the two biggest U.S. refiners, San Antonio-based Valero and its cross-town rival, Tesoro (TSO). The stocks of integrated players Marathon Oil (MRO), ExxonMobil, and Chevron also set 52-week highs last week on their robust profits.
"It’s true we’re enjoying pretty good margins right now and pretty good profits," says Bill Day, a spokesman for Valero Energy (VLO). "But that’s in spite of, not because of, the refinery outages. In this environment, with the supply-and-demand balance so tight, this is really when you want your refineries running full blast. That’s why we get heartburn every time we hear of an outage. You really want everything running full capacity."
The reports of rich profits alongside higher pump prices have some groups crying foul. "Oil companies that have refused to increase refinery capacity enough to meet population took refineries out of service for longer [and] refused to import gasoline to make up the difference," says Judy Dugan, research director of the Foundation for Taxpayer & Consumer Rights in Santa Monica, Calif. "Then they have the gall to behave as though gasoline prices are an act of fate, not the shortage that they created."
But industry representatives and analysts dispute the notion that the problems are manufactured. "Saying it’s a deliberate shortage is ridiculous," says Charlie Drevna, executive vice-president of the National Petrochemicals & Refiners Assn. "Especially considering the margins right now, the last thing a refiner wants is to have a planned outage. You may want the other guy to have one, but you sure as heck don’t want one." Says Lynn Westfall, Tesoro’s chief economist: "It’s the working of Economics 101. Any time supply goes down, margins go up."
Refiners say they aren’t building new facilities because of the soaring costs of steel and concrete and because of "not in my backyard" opposition from communities. Another issue hindering both new construction and output at existing facilities is a shrinking pool of skilled refinery workers, analysts say.
From geologists to engineers to skilled offshore workers, the oil industry is having trouble sourcing labor, and the problem is now becoming acute in the refining business. With excess capacity and falling oil prices in the 1980s and 1990s, refineries cut staff as a wave of consolidation swept the industry. The oil business was considered a volatile, if not dying, industry and has not been a popular career choice for college students.
"The oil industry doesn’t have the glamour or allure of industries like tech; it’s considered a smokestack industry," says Craig Pirrong, professor of energy at the University of Houston. "Then there’s the uncertainty of the future of carbon-emitting energies. That puts oil companies and refiners at a disadvantage in recruiting."
Good-Bye to $3
New regulations and quotas to produce new gasoline blends also stress refining. It’s also likely that many refiners have not yet achieved full efficiencies as they integrate new processes, say analysts. Under new rules that took effect in November, 2006, refiners are required to produce low-sulfur gasoline for the retail market nationwide; California law mandates another formulation of cleaner-burning fuel. Differing regional requirements also make it harder to substitute gasoline from one geographic area to another in the case of an outage.
With high costs and fierce civic and environmental opposition, oil companies and refineries like Valero and Marathon are opting to expand existing plants instead of building new ones. But quenching the ever-growing thirst of U.S. consumers will mean more gasoline imports from Western Europe, the Caribbean, and South Korea. The U.S. currently imports about 13% of its gasoline.
If the troubles persist, gasoline prices are likely to creep well beyond $3 nationally. And that will turn the issue toward demand — how much will consumers agree to pay to drive this summer?
Los Angeles Times
April 27, 2007
by Elizabeth Douglass & Richard Simon, Times Staff Writers
Oil giant Exxon Mobil Corp. and leading refiner Valero Energy Corp. cashed in on soaring gasoline prices during the first three months of the year — an accomplishment that on Thursday produced upbeat profit reports as well as a new chorus of condemnation from consumer advocates and politicians.
Exxon said its first-quarter profit jumped 10% to $9.3 billion, or $1.62 a share, as higher income from its refineries, gasoline sales operations and chemical plants more than offset a drop in production profits caused by lower prices for crude oil and natural gas.
The results at Irving, Texas-based Exxon were a company record for the first quarter, although not high enough to top the records it set last year. They represent a new twist for Exxon, however, because the gains did not come from soaring oil and natural gas prices, which drove its stunning 2006 income.
"It’s an incredible, incredible hot streak for refiners right now," said Tom Kloza, chief oil analyst at Oil Price Information Service in Wall, N.J. "And so far, April makes the first quarter look pedestrian."
On Capitol Hill, eight freshmen senators seized on Exxon Mobil’s profit news to launch a drive to pass energy legislation that would include instituting a windfall profits tax and rolling back oil industry tax breaks.
In California, the Foundation for Taxpayer and Consumer Rights provided a scathing response to Exxon’s earnings report.
"When refining profits are driving world-record profits, that means motorists are being gouged," said Judy Dugan, research director at the Santa Monica-based consumer group. "Congress and would-be regulators… should be demanding an end to profiteering by Exxon Mobil and its Big Oil brethren."
The backlash stems from a nationwide surge in retail gasoline prices that was unusual both for its size and its timing.
The U.S. average cost of self-serve regular rose more than 65 cents a gallon during a 10-week period beginning in February, before sliding less than a penny to $2.869 a gallon last week, the Energy Department reported Monday. Those increases hit motorists earlier than in previous years and well before the start of the traditional summer driving season.
The increases were highest in California, where the average pump price for regular gasoline passed the $3-a-gallon mark in mid-March, about a month earlier than in 2006. The statewide average price of $3.316 reported Monday was just shy of the record price of $3.332 hit last May.
Refiners such as Exxon have said the high prices reflect unrelenting fuel demand amid lower-than-normal production and fewer deliveries of imports. Gasoline production is down because planned maintenance and unexpected glitches have kept refineries off line longer than expected, they say.
"The market dynamics set what’s going on," Exxon spokesman Ken Cohen told reporters Thursday. "In the area of retail gasoline, we are a price taker, not a price maker."
San Antonio-based Valero, the nation’s largest refiner, reported first-quarter net income of $1.14 billion, or $1.86 a share, a 35% increase from $849 million, or $1.32, a year earlier. Valero operates 15 U.S. refineries, including two in California that had refining margins that topped those of the company’s other regional operations.
Earnings at Exxon’s refining and marketing operations totaled $1.9 billion for the first three months of 2007, more than a 50% increase from the same period last year. Much of the profit increase came from overseas fuel production and sales, where earnings jumped 81%. The company’s U.S. refining and sales operations, which include a refinery in Torrance, posted a nearly 24% increase for the quarter.
Exxon’s flagship oil and gas production and exploration business posted profit of $6 billion, down 5%. Total revenue for the quarter was $87 billion, down 2% from a year earlier.
Cohen of Exxon downplayed the results, saying the U.S. refining and marketing profits averaged 8 cents a gallon.
But that figure was almost certainly lower than what Exxon was collecting in California, judging by several published estimates of refining margins in the state.
Such margins subtract the cost of crude oil from the resulting sale price of gasoline and other products, and are considered an indicator of profit even though they do not account for other operating costs.
"Out in California, gasoline has been fetching more than $100 a barrel for about a month now," said Kloza, who noted that the cost of crude oil for California refiners has been well below the recent benchmark oil price of more than $65 per barrel. "That’s an incredibly lucrative business."
Shares of Exxon and Valero both achieved 52-week closing highs Thursday. Exxon rose 63 cents to $80.55 and Valero gained $1.42 to $71.74.
Contact the authors at firstname.lastname@example.org and email@example.com
Douglass reported from Los Angeles and Simon from Washington.
April 10, 2007
CONTACT: Judy Dugan, 310-392-0522 ext. 305, cell: 213-280-0175, or Jamie Court, ext. 327, cell: 310-874-9989
Santa Monica, CA — With California pump prices running about 50 cents a gallon above the U.S. average and nearly 30 cents above the next-highest states, the House Domestic Policy Subcommittee today sent a letter to major refiners requesting their plans to remedy the disparity. It also requests that the major oil companies lift restrictions that prevent retailers from offering motorists renewable fuels, including high-ethanol E85.
"The subcommittee is clearly expecting answers, and Californians want to see them," said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, which praised the Congressional initiative.
The letter, signed by the chairman of the subcommittee, Rep. Dennis Kucinich of Ohio, states:
"As we head into the summer driving season and the likelihood of higher gasoline prices, possibly reaching $4 per gallon [in California], the Domestic Policy Subcommittee of the Oversight and Government Reform Committee requests your assistance in understanding the causes of this price disparity."
In the news release, Kucinich says "Congress can no longer sit on the sidelines and watch as escalating prices continue to take a heavy economic toll on consumers and risk further harming our economy."
The Foundation for Taxpayer and Consumer Rights noted the subcommittee’s acknowledgment that deliberate restrictions in California’s refining capacity are a driver of outlandish gasoline prices in the state, which AAA pegged at $3.281 a gallon for regular today. The national average was $2.792, with Hawaii and a few other states near $3.00.
"We hope that this is just the first shot across oil companies’ bow on gasoline prices," said Judy Dugan, research director of the nonprofit, nonpartisan FTCR and its website, OilWatchdog.org. "Rep. Kucinich is on the right track in fingering the lack of refining capacity as the cause of California’s acute problem — gasoline prices that are far higher than the price of crude oil can justify."
The letter noted that refiners, particularly in California, are making outlandish margins of up to $39 per barrel, up from their previous average of $17. This soaring profit was first noted by the San Francisco Chronicle on March 9. Read the story here.
The subcommittee’s letter said, "As we approach this year’s peak driving season, the Subcommittee wishes to know how these factors of decreasing capacity, decreasing supply, rising profitability and increasing market concentration may be related to cause new record highs in the price of gasoline." It then asks the refiners who dominate California’s market, including Chevron, Exxon, Tesoro, Valero, ConocoPhillips and Shell, to state their plans for increasing the supply of gasoline as the summer driving season approaches:
"1. What is your strategic plan to raise the supply of gasoline for the onset of the peak driving season, which is only weeks away?
2. What steps are you planning to take, and when do you plan to take them, to bring back online refining capacity that you have removed from production? When do you plan to have attained maximum refining capacity?
3. What steps are you planning to take, and when do you plan to take them, to find supply other than your own production to bring your inventory to the national average of up to 30 days supply?"
"Refiners are unlikely to have persuasive answers to these questions," said Jamie Court, president of FTCR. "The oil industry deliberately restricted refining capacity in California as population and demand grew, to the point that even planned refinery maintenance causes a price spike that boosts profits. This is fine for the oil companies, which no longer compete on price and can make more money without increasing sales."
In addition, the letter asks that oil companies lift restrictions on their retail dealers that make the sale of E85 and other renewable fuels economically infeasible.
It also asks that the companies and their distributors withdraw their opposition to the sale of gasoline that is price-adjusted for temperature. Gasoline expands in higher temperatures, meaning motorists in warm states like California pay more money for less energy in their tanks. See www.OilWatchdog.org for more details on both E85 sales and the "hot fuel" issue.
Oil companies will report first quarter profits in the next two weeks, and analysts widely expect another round of record profits, particularly refining profits, said FTCR.
FTCR urged the California Legislature to act on gasoline prices, now that Congress is grappling with the issue.
"Gasoline is up nearly 30 cents a gallon in just the last month, yet the silence in Sacramento is deafening," said Court. "The state’s economy is at risk and motorists are right to wonder who’s watching out for their interests, It’s bad enough that Congress had to take the lead, and it will be worse if the Governor and Legislature continue to ignore the looming economic threat of gasoline prices."
FTCR has urged that the state pass legislation to regulate refinery capacity so that the state has sufficient gasoline supplies to prevent price spikes during even routine maintenance shutdowns. Related legislation, which was proposed last year but not passed, should update price-gouging laws so that refiners could be investigated in periods of abnormal price spikes.
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