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Oil refiners' profits bring pain at pump

Steve EverlyThe Kansas City Star

KANSAS CITY, Mo. -- The conventional wisdom has been that gasoline shot to about $4 a gallon because the price of oil soared.

But oil refinery profits also have doubled, making that another big reason people are paying more at the pump.

Refineries are on track to reap their best profits in years. Even though U.S. gasoline use is declining, refiners have kept U.S. stockpiles below average by curbing production and exporting more gasoline.

"It's a good day to own a refinery," said Steve Mosby, vice president of Admo Energy, a fuel supply consulting company for fuel retailers.

For refineries, their margin is the difference between what they pay for crude oil and what they get for wholesale gasoline and other products. Those margins have been gradually rising this year and recently were more than double what they were a year ago, when they were 38 cents for a gallon of gasoline.

Last week the margins climbed more because of concerns that Mississippi River flooding could close some refineries and tighten supplies further.

At one point last week, the margins for wholesale gasoline sold in the Midwest were more than $1.20 a gallon, rivaling levels briefly seen after Hurricane Katrina in 2005.

Rising refinery profits have offset some of the recent drop in oil prices, keeping gasoline prices relatively high, although some relief could still filter through to retail fuel pumps. The idea that refinery profits are keeping gasoline prices from falling lower could add fire to recent criticism over oil-company profits.

Oil executives were grilled Thursday by a Senate committee over why an industry earning $35 billion in profits in the first quarter should still receive $4 billion in annual federal subsidies and tax breaks.

The executives didn't flinch, testifying that profits and subsidies were needed to find more oil.

"Don't punish our industry for doing its job well," said John Watson, CEO of Chevron Corp.

The role of increased refinery profits wasn't the focus of the Capitol Hill hearing, but oil companies acknowledge that margins are rising. ExxonMobil reported $10.9 billion in first-quarter earnings and said increased refinery margins were one reason its profits were up 69 percent from a year ago.

John Felmy, an economist for the American Petroleum Institute trade group, said refineries were struggling a year ago, and the increases in margins this year resulted from supply and demand and reaction to the Mississippi flooding.

But Tyson Slocum, director of the energy program at Public Citizen, a public interest group, saw the higher margins differently.

"It's good news if you're a shareholder of a major oil company but not if you're a motorist," he said.

Changes in refinery margins aren't as obvious and typically don't get the same notice as changes in the price of oil and gasoline. And for U.S. refineries, rising oil prices sometimes can obscure how much their margins really are.

That's because the "benchmark" prices that are widely reported are for light sweet crude -- oil that is easier to refine but more costly. And that oil has risen further and faster in price recently than the cheaper oil, referred to as heavy or sour, that most U.S. refineries are equipped to use.

McClatchy Newspapers asked WTRG Economics, an energy consulting firm, to calculate U.S. refinery margins using the oil costs actually paid by refineries, rather than the benchmark prices.

Doing that, WTRG calculated that the average U.S. refinery margin in January was 42 cents a gallon. By April it increased to 64 cents, a 52 percent jump. The first week of May it climbed to 78 cents, and the second week it averaged 80 cents a gallon.

Frontier Oil, which owns refineries in El Dorado, Kan., and Cheyenne, Wyo., reported record first-quarter profits because of higher refinery margins. Its refineries took advantage of heavy oil prices, which were $18 a barrel cheaper than lighter oil.

"We are extremely pleased with our record quarterly results and with the strengthening of refining margins continuing into the second quarter," Mike Jennings, the company's CEO, said in a statement.

In a conference call with analysts last week, the company said it was seeing more evidence of stronger margins, and it was confident they would continue, even with lower demand for gasoline.

"Nationwide we have seen demand destruction, but it's being offset by refinery utilization" cutbacks, said Joey Purdy, vice president of commercial operations for Frontier.

The Energy Information Administration last week said demand for gasoline had fallen 2.9 percent in the past month, while the country's refineries were using only 81.7 percent of their capacity. That meant they were processing 900,000 fewer barrels a day of gasoline than a year ago.

Refineries also are exporting more gasoline, especially to Mexico and Latin America. In February, the most recent month for which figures were available, the U.S. exported 400,000 barrels of gasoline a day, or about 5 percent of U.S. demand. U.S. exports are at their highest levels since the information started being collected in 1945.

So even though crude oil stockpiles are above average, and oil prices have come down recently, U.S. gasoline inventories remain below average. And that could help keep pump prices from fully reflecting the recent decline in crude oil.

"They're cutting (U.S. gas stockpiles) back to keep prices up," said Slocum, of Public Citizen.


By STEVE EVERLY
McClatchy Newspapers