Rising Profits Pump Up Criticism of Oil Refiners
Record-high gasoline and diesel prices are driving up profits at U.S. refineries and providing fuel to critics who claim the oil industry is cashing in on sky-high pump prices.
Big first-quarter gains have been reported by companies with refineries in California, where retail prices have climbed much higher than in other parts of the country. Gasoline hit a record statewide average of $2.157 a gallon April 12, and diesel reached $2.274 a gallon May 3.
“They’re making money hand over fist in the refining business,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights, a Santa Monica group that has accused oil companies of gouging motorists. “These results show that California is the profit center for all of these major refiners.”
Big profits are nothing new for refiners in California. But analysts are impressed by the sustained high level of so-called refining margins for companies that make and sell gasoline and diesel in the state, where antipollution rules require a special blend of fuel that is often in short supply.
A barrel of gasoline sold in California “is worth two barrels everywhere else,” said Fadel Gheit, an Oppenheimer & Co. analyst who owns some oil company shares.
Pump prices have been rising around the country and could go higher. On Tuesday, spurred by supply worries, traders sent the futures price for regular gasoline to $1.306 a gallon in New York, and spot prices topped $1.71 a gallon in Los Angeles -- both records.
Crude oil, meanwhile, closed at a 13-year high of $38.98 on the New York Mercantile Exchange.
“This is clearly a runaway market,” said Tom Kloza, chief oil analyst at the Oil Price Information Service, a company that tracks fuel trades. “Everything is really off the charts.”
The oil industry contends that retail prices are a fair reflection of tight supplies and other market conditions.
“We’re no different than the auto industry, which raises prices when demand is high, and that increases profits,” said John Felmy, chief economist at the American Petroleum Institute and the industry’s lead spokesman on gasoline and oil price issues.
“When the price goes down,” he added, oil companies can lose money.
That wasn’t the case in the first quarter. To cite one example: Valero Energy Corp., whose California refineries are in Benicia and Wilmington, last week reported record profit for the first quarter.
Valero executives told analysts that gasoline refining margins remained at record levels and that the company expected second-quarter profit to handily beat Wall Street estimates. Investors have responded by pushing Valero’s stock up more than 40% this year.
California’s other big refiners -- ChevronTexaco Corp., Shell Oil Co., BP, ConocoPhillips, Tesoro Petroleum Corp. and Exxon Mobil Corp. -- also recorded big profits in the first quarter.
“The margins have been spectacular, so all of these guys are making a lot of money,” said Jacques Rousseau, an industry analyst at Friedman Billings Ramsey.
“Our earnings estimates are significantly too low.”
A refining margin is the average price at which a refiner sells its product, minus the cost of crude oil, which is a refiner’s largest single expense. The tight gasoline market in California in recent years has allowed gasoline producers to pass higher crude costs directly to consumers.
In the last two months, refinery margins in California have been running at more than 50 cents for every gallon of gasoline produced, according to the California Energy Commission. That’s well above the average West Coast refining margin of 28 cents a gallon over the last four years and almost double today’s refining margins on the Gulf Coast.
In a state that consumes 46.2 million gallons of gasoline daily, a refining margin of 50 cents a gallon translates into $23.1 million a day for refiners.
Figuring out how much of that is profit is tricky, however -- a point oil industry officials make when critics use refining margins as evidence of profiteering.
Oil companies don’t reveal profit figures for their refining operations. And even though analysts use refining margins as a way to measure net income, the margin figures don’t account for a raft of non-crude costs that every refiner must pay, from workers’ compensation insurance to electricity bills and maintenance.
“There are industry opponents and politicians who will cite profit increases as some indictment of the industry ... but you’ve got to look at the overall profit rate,” which was 6.7% in the first quarter, said the API’s Felmy. Refineries are expensive to run and require millions of dollars in upgrades to comply with environmental requirements, Felmy noted. Though margins are rising at those facilities, he said, “I would still argue that it’s a fair rate of return.”
Felmy also said the rising cost of crude oil, which can represent as much as half the price of a gallon of gasoline, has had a big role in pushing up prices for gasoline, diesel, jet fuel and other crude byproducts.
The $6.46 rise in the cost of a barrel of crude oil this year accounts for less than 30% of the 56-cent increase in the average per-gallon pump price for gasoline in California.
Industry experts say gasoline prices got an extra boost in California when some refiners had mechanical problems that reduced production and upset the precarious balance between supply and demand. California’s relative isolation and special blend of fuel make replacement supplies hard to come by, and that has allowed refiners to sell their products at record prices and gasoline retailers to pass those higher prices along to motorists.
“In any competitive industry when you have the kind of outages and operational glitches that we’ve seen this year, you would see their profit margins hit,” said Michael Shames, executive director of the Utility Consumers Action Network, a San Diego advocacy group. “Regrettably, we are seeing just the opposite.”
