The Kansas City Star
April 28, 2007
by STEVE EVERLY, The Kansas City Star
As supply shrinks, gas prices rise;
Falling imports, strong demand, insufficient capacity all blamed.
Tight gasoline supplies have set the stage for higher fuel prices going into the summer, prompting renewed criticism of refinery profits.
Gasoline inventories have struggled to recover this spring in part because of higher demand, refinery outages and lower fuel imports. Figures released Wednesday by the Energy Information Administration showed gasoline inventories down an additional 2.8 million gallons.
As a result, prices at the pump have surged and are approaching record levels.
Gasoline prices in the Kansas City area were up Friday on average more than 10 cents to about $2.80 per gallon of regular fuel on the Missouri side and a few cents higher on the Kansas side. Nationwide, according to AAA, prices average $2.91 per gallon, up 30 cents from a month ago. The record — from September 2005 — was $3.06.
Industry officials said declining imports and strong demand had caused the tight supplies and higher prices.
Critics suggested that the source of the difficulty was insufficient refinery capacity, which has kept supplies unnecessarily tight and refinery profits extraordinarily high.
Financial results released this week by ExxonMobil Corp. and Chevron Corp. showed higher profits for the first quarter even with lower earnings from crude oil sales. Both companies credited higher refinery margins for helping to make up the difference.
ExxonMobil reported a $9.3 billion profit for the first quarter, up 10 percent, while Chevron reported $4.7 billion for the first quarter, up from $4 billion for the same period last year. The segment of Exxon¿s business that includes the refineries earned $1.9 billion in profits, up $641 million.
Those figures, said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights in Santa Monica, Calif., show that rising refinery profits are in essence forcing the public to subsidize the oil industry.
"Every time you put the nozzle into your tank, you’re making up for any perceived shortage of profits they have elsewhere," she said.
Refinery margins, the difference between the wholesale price of gasoline and crude oil costs, are a widely accepted gauge of refinery profits — even though they don’t account for all the costs of producing fuel. The margins in recent weeks have surprised even veteran observers of the industry.
"They’ve been outrageous," said Lewis Adam, president of Admo Energy, a Kansas City company that helps companies manage the risk of volatile fuel prices.
Earlier this month, those margins briefly kissed 95 cents per gallon. Although they have since subsided, they were at 64 cents per gallon on Wednesday, according to WTRG Economics, a private energy consulting firm. That is roughly three times the typical level for this time of year.
James Williams, an economist at WTRG, had been expecting prices to ease and refinery margins to be lower. But unexpected refinery outages have helped keep supplies tight and the market for gasoline more volatile than expected.
"We were too optimistic," he said.
John Felmy, an economist with the American Petroleum Institute, said that refineries actually produced more gasoline in the first quarter than for the same period last year. But factors such as falling imports and rising demand have helped to keep supplies tight.
Felmy, noting that imports of gasoline were beginning to rebound, said the API expected prices would eventually ease. Unlike the Energy Information Administration, which is reporting demand increases of more than 2 percent, the API believes that demand declined by 1 percent in March in reaction to the higher prices.
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