Squeezed At Both Ends — Independent Refiners Watch Profits Sink As Consumption Falls
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