04-11-07 by Dugan
Oil companies say they’re just at the mercy of mysterious "markets," But combine today’s news about energy-price worries and analysts’ predictions of more record profits for Big Oil, and a different story emerges. The stock market took alarm at the Federal Reserve’s nagging worries about what climbing energy prices will do to inflation and interest rates. Analysts, meanwhile, marveled at the fantastic refining profits of oil companies and predicted more to come.
To see how it works, let’s translate this statement from Prudential Equity oil analyst Jason D. Gammell into plain English:
"Refining margins [profits] are at a pace that surpasses last year’s record levels," said Gammel in a note to clients. "While unplanned refinery downtime is a significant driver of the current margin environment [ refineries are producing less gasoline, but charging so much that they more than make up the difference in profit] , we are also ascribing to the idea that tighter product specifications, increasing refinery complexity, and tightness in equipment and services are going to lead to lower refinery utilization rates prospectively."[Oil companies show no sign of expanding their refinery capacity, and complexity leads to breakdowns, which provide the "reason" for enormous price spikes that raise overall profits.]
"While we expect utilization rates to improve as we transition out of maintenance season, refined product inventories are at very low levels," [Refineries will soon begin to produce a little more gasoline, but because they keep backup supplies to the minimum, fuel prices are likely stay high and keep rising] he noted, maintaining a favorable outlook on the integrated oil sector.
For a big oil company, the manufacturing of gasoline and other fuels from crude oil is the part of their business that they control completely. The cost of making gasoline is stable and predictable. When crude oil prices rise, oil companies don’t just pass the price increase to consumers–they tack on more than double the crude oil increase as the oil is made into gasoline. Their costs of making gasoline don’t go up, but their profit zooms. They can increase the profit even more if gasoline is in short supply–a chronic, deliberate condition in the West and particularly California. Oil companies are building refineries in India, but not on their home ground.
Oil companies make a show of "blaming" refinery outages for gasoline price increases, but the reality is that they’re making more profit than ever from not producing more gasoline. That’s why oil companies have barely lifted a finger to add to their ability to make gasoline for California: by operating right on the edge of their capacity, they keep the market short of gasoline and charge piratical prices for it.