Blowing the top off gas prices

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‘This is all about the refineries
making a killing’

The Kansas City Star

It’s not just $72-a-barrel oil that’s costing you at the pump. Big Oil’s soaring refining profits far outweigh the rising cost of crude as the cause of this year’s spike in gasoline prices.

Refinery margins, the difference between the cost of crude oil and the wholesale price of gasoline, are now about 62 cents a gallon — and in some cases much higher for refineries equipped to handle cheaper grades of crude. By one measure, the only time margins have been higher was briefly after last year’s Hurricane Katrina.

Even this week’s record price for crude oil accounts for at most a third of the year’s run-up in gasoline prices. The rest of the increase is almost entirely due to the rising margins now being earned by refineries.

“This is all about the refineries making a killing,” said Jamie Court, president of the Foundation for Taxpayer & Consumer Rights in Santa Monica, Calif.

Area motorists found gas prices up again Thursday by an average of 5 cents per gallon to $2.80 per gallon on the Missouri side and a few cents higher on the Kansas side because of higher taxes. Prices a year ago, according to the AAA Auto Club of Missouri, were 70 cents per gallon lower. Last January they were 73 cents lower.

Rising gas prices had government officials scrambling Thursday to defuse any criticism that they are not doing enough to help consumers. Secretary of Energy Samuel Bodman said in a statement that there are many legitimate reasons for the increase in prices, including rising demand, the transition to summer blends of gasoline, the high price of crude oil, and the lingering effects on refinery production of last year’s hurricanes. He did, however, mention a government Web site to report any price gouging by gasoline stations.

“By reporting suspicious activity, consumers can help us send a message that illegal activity won’t be tolerated and bad actors will be held accountable,” he said.

But gas stations have benefited little from this year’s run-up in prices. In the Kansas City area, they are earning a few cents a gallon, just enough to cover the cost of processing fees on purchases by credit card, which a majority of customers use.

The rest of the price of gasoline goes to taxes, crude oil costs and refinery margins. The federal gas tax is 18.4 cents a gallon. The state tax in Kansas is 25 cents, and it’s 17 cents in Missouri. The cost of oil counts for roughly up to $1.70 of the cost of a gallon of gasoline, although cheaper grades of oil can reduce the cost of the commodity by 5 to 20 percent — and sometimes more.

That leaves the refinery margin, which accounts for most of this year’s increase in gas prices. The margins don’t include operating expenses in producing the gasoline, but the Department of Energy says they are still a key indicator of the industry’s profitability.

Those margins dipped to just a few cents a gallon early this year, at a time when gasoline supplies were building up. But the margins have climbed dramatically since then and are now about 62 cents per gallon if more expensive West Texas Intermediate crude is used. Those using cheaper grades of crude, which a majority of U.S. refineries can do, are reaping margins that now can be as much as $1 a gallon.

“Except for after the hurricane, these are historic prices,” said James Williams, an analyst at WTRG Economics.

The benefit to oil company coffers will soon unfold as oil companies release first-quarter results. Exxon Mobil and ConocoPhillips will report next week. Exxon Mobil didn’t return a message seeking comment, and a spokeswoman for ConocoPhillips said it would not discuss refinery margins.

One potential piece of bad news for oil companies is that refinery margins overseas are currently less than half of what they are in the United States. Friedman Billings Ramsey, an investment banking firm in Arlington, Va., said in a report Wednesday that refinery margins in Asia and Europe were about 30 cents a gallon.

A majority of U.S. refineries benefit from being able to handle cheaper grades of crude, which boosts their margins. For example, Frontier Oil Corp., which has refineries in Wyoming and Kansas, has been receiving supplies of some of the cheapest crude available, which is coming from the Canadian oil sands. Frontier’s stock has risen this year from $30.62 to its Thursday close of $60.98 a share.

Doug MacIntyre, senior oil analyst at the federal Energy Information Administration, said there are legitimate reasons for U.S. refining margins being so high. The switch to summer fuels has been a particular problem this year, because more ethanol is being used to make the cleaner-burning gas required in some regions of the country. There are questions of whether ethanol supplies will be sufficient to meet demand as the transition to the fuels is completed next month.

In addition, he said, the production of gasoline has been down from a year ago, which has helped to cause inventories to decline. Some refineries postponed maintenance after last year’s hurricanes, and that work is being done now, which has tightened supplies and caused margins to increase.

But Court, of the Foundation for Taxpayer & Consumer Rights, said such reasons shouldn’t be accepted. A study by the consumer group concluded that higher refinery profits cost Californians an extra $546 million in April compared with the same period last year.

If ethanol was the reason, then prices wouldn’t have also climbed so high in areas where the cleaner-burning fuels aren’t required, he contends. And if there has been a drop in gasoline production, Court said, the oil companies know that any decline is going to cause problems because they haven’t built additional refining capacity.

“The oil companies know this. They are very smart,” Court said.

So is there any good news? Perhaps. On Thursday it was reported that some idled gasoline production was coming back online. Wholesale gas prices in the Midwest declined about 4 cents a gallon, and on the Gulf Coast the drop was about 10 cents. But it will take some additional trading sessions on the gasoline market to determine whether there is enough momentum for declining prices to give some real relief to motorists.

“That’s the billion-dollar question,” said Steve Mosby, vice president of Admo Energy, which helps companies buy fuel and manage their energy risks.
To reach Steve Everly, call (816) 234-4455 or send e-mail to [email protected]

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