As motorists paid record gasoline prices this summer, oil refiners were ringing up record profits – and that was before hurricanes Katrina and Rita. In a free market system, private enterprises are free to earn what they can (note the headline from the front page of Friday’s Wall Street Journal: “How some doctors turn a $90 profit from a $17 test”), but the dramatic rise in energy prices deserves scrutiny.
If gas prices just reflected rising crude oil costs, refiners would enjoy higher revenues with consistent profit margins. Instead, U.S. refineries’ gross margins (gasoline prices minus crude oil costs) tripled from $7 per barrel in September 2004 to $22 per barrel last month, reports Denver Post writer Steve Raabe.
On Sept. 1, during Katrina, refinery profits hit record levels of nearly $32 a barrel on gasoline sales, compared with more typical margins of $6 to $8 per barrel. The increase in refining margins that day was 434 percent over the same day a year earlier. Those numbers smack of avarice.
It’s true a new oil refinery hasn’t been built in the United States since 1976, but industry fortunes belie the claim that environmental rules are the reason. In recent years, as the industry consolidated into larger and larger firms, they have realized larger and larger returns. Today, five companies (Exxon Mobil, BP Amoco, Royal Dutch Shell, Chevron and ConocoPhillips) own 42 percent of U.S. refining capacity. From September 2004 to last month, net income rose for ConocoPhillips 65 percent, 39 percent at Royal Dutch Shell, 38 percent for Exxon Mobil and 31 percent for BP Amoco.
Only Chevron’s dropped 4 percent. New refineries might increase operating costs but dilute profits, so it’s hard to see that the oiligarcs are motivated to add capacity.
One refiner defended recent profits noting that in past years the industry had been in a trough. Oil supply and demand “are balanced on a pinhead. If you get the smallest little upset in production – maybe a refinery down for a few days – it’s going to cause prices to spike because other refineries are already at peak production,” noted Steve Douglas of Suncor, which runs the refinery in Commerce City.
When the economy is jolted by price pressures, we expect government officials will do some jaw-boning to mitigate any damage. We urge President Bush to pound the bully pulpit if that’s what is required before energy costs cause a fourth-quarter economic slowdown.
