The nation’s oil refiners are marking up wholesale gasoline prices to historically high levels, causing motorists to pay near- record amounts at the gas pump.
Gasoline shortages from hurricanes Katrina and Rita have caused some price spikes. But refiners’ gross profit margins have been climbing steadily for the past year, long before the hurricanes hit.
A Denver Post analysis shows that gross profit margins on gasoline at the nation’s refineries have more than tripled from about $7 a barrel in September 2004 to $22.77 on Tuesday.
Gross refining margins – calculated by subtracting refiners’ crude-oil purchase price from their wholesale gasoline selling price – have been a key contributor to huge increases in net profit for the biggest oil companies.
The nation’s top five oil companies – Exxon Mobil, BP, Royal Dutch Shell, Chevron and ConocoPhillips – own 42 percent of U.S. refining. In the first half of 2005 compared with the first half of 2004, net income increased 65 percent for ConocoPhillips, 39 percent for Royal Dutch Shell, 38 percent for Exxon Mobil and 31 percent for BP. Chevron reported a 4 percent decrease.
“It’s very difficult for consumers to go to the gas pump and pay record high prices for gas and then open the business page and see where oil companies are making record profits,” said U.S. Sen. Mark Pryor, D-Ark., the ranking Democrat on a Senate consumer affairs subcommittee.
“My suspicion is that (refiners) are taking advantage of the American public,” he said. “We can’t prove it yet, but that’s my suspicion.”
Energy analysts and economists say refiners have been able to increase margins for two main reasons:
Limited refining capacity that can cause spot shortages of gasoline. When supplies are short, prices – and margins – go up. “The refining margins are huge right now,” said Rich Gilbert, economics professor at the University of California, Berkeley. “There isn’t enough gasoline to go around.”
Lack of competition in the refining sector. Big mergers that brought together companies such as Exxon and Mobil, Chevron and Texaco, and Conoco and Phillips have reduced competition.
Refiners say the high margins reflect gasoline supplies that were tight before Hurricane Katrina and have since grown much tighter. Yet, throughout the past year, refinery profit margins have climbed sharply compared with crude-oil prices.
Average gross margins have soared from $6.44 a barrel on Sept. 27, 2004, to $22.77 Tuesday, a 254 percent increase, according to a price analysis by Bryant Gimlin of Fort Lupton-based Gray Oil Co. During the same period, crude-oil prices rose 31 percent.
High refining margins and oil- company profits have sparked calls for investigations of price gouging and anti-competitive practices.
On Sept. 1, during Hurricane Katrina, refinery gross profits hit record levels of nearly $32 a barrel on gasoline sales, compared with historic margins of $6 to $8 a barrel. The increase in the refining profit margin that day was 434 percent over the same day a year earlier.
The Federal Trade Commission has started an investigation to determine whether illegal industry behavior may have led to gasoline price gouging after Hurricane Katrina.
Political leaders in Colorado and elsewhere are calling for enactment of anti-gouging laws to protect consumers – even though gouging is hard to define and even harder to prosecute.
“The entire industry needs to be looked at under a bright light,” said U.S. Rep. Diana DeGette, D-Colo. “We can’t have oil companies and refiners making record profits at the expense of the national economy.”
Colorado’s average price for regular gas is $2.88 a gallon, down 19 cents from the Sept. 7 record high but more than $1 higher than last year. But consumers could see another round of gasoline price increases as damage from Hurricane Rita to oil wells and refineries around the Gulf of Mexico is reported.
Suncor USA, operator of Colorado’s only refinery, said the high margins are a function of supply-and-demand economics. As supplies tighten and demand remains strong, prices rise. Major refiners such as Valero, BP, ConocoPhillips, Shell and Chevron declined to comment for this article.
Gross refining margins are defined as the amount of money refiners make from selling gasoline and other products, minus their costs for crude oil. The refiners’ net profits are lower than gross margins because of additional costs such as operating expenses, payroll, marketing, distribution and taxes.
Large oil companies do not divulge net margins in their financial statements.
“Margins are subject to complicated bookkeeping and can be very difficult to unravel,” said UC-Berkeley’s Gilbert. “But when you see companies’ stock prices go up by 50 percent, you know that the stock market thinks they are profitable.”
The Amex Oil Index, which reflects the stock prices of 13 of the world’s largest oil companies, is up 49 percent so far this year. By comparison, the Dow Jones industrial average, which tracks 30 blue-chip stocks, has dropped 3 percent so far this year.
“There’s no question refining margins are up,” said Steve Douglas, general manager of supply and marketing for Suncor’s refinery in Commerce City. “But you’ve got to consider that the refining industry has been in a deep trough for a number of years when margins were small or nonexistent.”
No new refineries have been built in the U.S. since 1976, and current high margins reflect tight supplies of gasoline and other refined products, Douglas said.
“We’ve gotten to the point where supply and demand are balanced on a pinhead,” he said. “If you get the smallest little upset in production – maybe a refinery down for a few days for maintenance – it’s going to cause prices to spike because other refineries are already at peak production.”
The supply-demand tightness exploded into shortage when Hurricane Katrina shut down 10 Gulf Coast refineries that supply about 18 percent of the nation’s gasoline. Four of them remain closed and may not reopen for weeks or months.
Supplies of gasoline are much tighter than crude-oil supplies and thus are more susceptible to volatility and price increases, Douglas said.
“There isn’t currently a shortage of crude oil in the U.S.,” he said. “But on the production side, we’re so close to capacity that shortages can happen quickly and create price spikes.”
Suncor’s Commerce City refinery gets much of its crude oil from Canada, Colorado and Wyoming, not the Gulf of Mexico, and thus was not affected by supply disruptions from Katrina. But its profit margins were consistent with increases in the rest of the industry, Douglas said.
If the refinery had cut wholesale gasoline prices to reflect its comparatively lower-priced non-Gulf crude, then out-of- state refiners that rely in part on Gulf crude to supply Colorado would have sold their gasoline to other markets at higher prices, leaving Colorado with a shortage, Douglas said.
Energy analysts say that while public scorn often is directed at gas-station owners, the retailers survive on profits of just a few cents a gallon.
But the sharp increase in refining margins is a key reason gasoline prices at the pump reached record highs earlier this month.
“I try to keep a 10-cent (a gallon) margin. Sometimes I make it; sometimes I don’t,” said Tom Greenlee, owner of a Denver Tech Center Sinclair station. “If you’re looking for profits, I guess refiners are where you’d look.”
Suncor began offering rebates to some of its fuel customers when wholesale prices spiked during the hurricane. Suncor temporarily rebated 25 cents a gallon to the 200 Phillips 66 stations it supplies in Colorado.
Suncor continues to offer rebates of 10 cents a gallon on jet fuel for airline customers at Denver International Airport. To date, Suncor has spent more than $600,000 on the jet-fuel rebates, Douglas said.
Staff writer Ross Wehner contributed to this report.
Staff writer Steve Raabe can be reached at 303-820-1948 or sraabe@denverpost.com.
