Pumped-up profits for oil refiners;

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Gas prices artificially inflated, critics claim

San Diego Union-Tribune

Several oil refiners have reported high-octane first-quarter profits this week, reflecting the positive impact record-high gas prices in San Diego County and across the country have had on the industry.

The results have fueled the ire of industry critics, who contend that the expanding profit margins are driven by artificially inflated gasoline prices and manipulation of refinery supplies in California and elsewhere.

An announcement Tuesday from BP that first-quarter profits jumped 17 percent over the company’s record profits last year, for instance, “is consistent with a two-year trend showing profits skyrocketing in sync with pump prices — in other words, price gouging,” said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

“If greater OPEC crude costs were truly driving up the price of gas, rather than price gouging, oil company profits would not be soaring,” Court added.

ConocoPhillips, the biggest refiner and fuel marketer in the United States,said yesterday that first-quarter net income jumped 33 percent to $1.62 billion, or $2.33 a share. Refining and marketing income from continuing operations was $464 million, up from $202 million in the previous quarter and $389 million in the first quarter of 2003.

Unocal Corp., one of the biggest U.S. oil and natural gas producers, said net income doubled to $269 million, or $1 a share. The nation’s top independent refiner, Valero, said its profit soared 44 percent to $245 million, or $1.82 a share.

ExxonMobil is expected to announce first-quarter results today, with ChevronTexaco releasing its earnings tomorrow. Analysts expect both companies to post vastly increased profits in light of the recent favorable market for petroleum products.

Oil industry representatives defend refiners’ growing profits as a function of selling more fuel at prices pushed up largely by elevated crude-oil rates.

They say gas prices have been higher than normal, especially in California, since the end of last year because of soaring consumer demand, stretched supplies and occasional refinery glitches.

“Every investigation ever conducted has found no inappropriate behavior” on the part of refiners in the state, said Anita Mangels, a spokeswoman for the Western States Petroleum Association, a trade group.

The pricing and profit structure in the industry is a reflection of “market forces at work,” she added.

The price of a gallon of unleaded regular gasoline in the county Monday was $2.20, down 3 cents from a week ago and off 7 cents from the record high set April 5, according to a survey by the Utility Consumers’ ActionNetwork. Nationwide, the average price last week was $1.81.

The sterling earnings reports from refiners came as a state Assembly committee mulled the competitive viability of California’s gasoline market.

The committee, chaired by Assemblywoman Christine Kehoe, D-San Diego, heard from representatives of the oil industry, consumer groups and analysts who offered ideas on loosening the tight gas supply in the state as well as lowering persistently high prices here.

One possible solution on pricing, at least, would be to allow branded dealers to buy gas on the open market instead of being compelled to obtain it from parent refiners, said Richard Gilbert, chairman of the department of economics at the University of California Berkeley.

“A key to lower gasoline prices in California is to unlock the ties that currently exist between California refiners and retail stations,” Gilbert noted in prepared remarks. “These ties lower incentives for retailers to shop for cheaper gas and in this way make it less profitable for refiners to lower prices. These ties also make entry difficult for new wholesale suppliers and narrow the supply available to independent, unbranded marketers.”

Kehoe said she was looking at the recommendation as the basis of possible legislation to help increase competition and supplies in the market.

But industry representatives say an open-supply scheme would not address the state’s problem of low supplies, which now barely meet growing consumer demand.

The Western States Petroleum Association said the state’s 13 refineries produce 45 million gallons to 46 million gallons of fuel a day — just enough to fill the region’s car tanks.

Moreover, consumer demand for gas in California was up 4 percent in the first quarter, even with record-high prices for some of that period.

The petroleum association says one factor crimping supply is state regulations that make it impractical for companies to open new refineries.

“We haven’t built one in 35 years,” Mangels said.

Valero Chief Executive Bill Greehey predicted yesterday that refiners will not keep up with fuel demand this summer, sending prices higher. Rising gasoline prices lift crude-oil prices, boosting profits for producers and refiners.

The 12-month average price of natural gas is also at a record as domestic production falls.

“The refining system is already being strained, and we’re not even in the peak season yet,” Greehey said in a conference call with investors.

U.S. margins on processing crude oil into gasoline, diesel and other fuels in the current quarter are 57 percent above the 10-year average. A strengthened economy is boosting demand, which is at a record high for the time of year, according to government data.

ConocoPhillips, for one, benefited from higher refining margins, rising energy prices and a $449 million gain on an asset sale. Every 25-cent increase in refining margins boosts full-year net income at ConocoPhillips by $125 million, according to company filings.

Margins for the industry averaged $7.26 a barrel in the first three months of the year, the strongest first-quarter performance since at least 1990.

“The combination of good demand and tight supply is raising profits,” said Darren Peers, who helps manage $17 billion, including more than 6 million ConocoPhillips shares, at NWQ Investment Management in Los Angeles.
Bloomberg News contributed to this report.
Frank Green: (619) 293-1233; mailto:[email protected]

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