Refinery profit margins double in West;

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It’s one reason price of gas in state is up 44 cents since Feb. 1


Profit margins at California’s gasoline refineries are soaring. And they’re taking pump prices along for the ride.

Refinery profit margins have more than doubled since last fall, according to one rough measurement, and now stand at $39 per barrel on the West Coast. That’s more than double their average of $17 for the last five years.

Bulging refinery margins are one of the reasons Californians now pay $2.96 for a gallon of regular, up 44 cents since the start of February. And they play a part in record multibillion-dollar profits of major oil companies.

Californians also pay far more than drivers in other states do. The state’s average now is 45 cents higher than the national average. Usually, the difference is more like 25 cents.

Refineries don’t release precise profit figures. But the margins can be tracked, roughly, by measuring the difference between the cost of the crude oil refineries use and the price they charge for their finished products.

Why the jump? The refineries that make California’s unique, pollution-fighting blend of gas have cranked out 7.8 percent less gasoline since the start of February than they did in the same period last year. That smaller supply brings higher retail prices.

Gasoline production always dips in February, when California refineries perform maintenance and switch from winter to summer blends of fuel. But this year’s maintenance season has been plagued by unexpected, sometimes bizarre problems. Earlier this week, two Los Angeles-area refineries lost power when an opossum and a raccoon broke into separate electrical substations and electrocuted themselves.

Consumer advocates call many of the refinery problems a sham. The oil companies, they say, are limiting gasoline supplies to drive up prices and profit margins, just as power companies did during the state’s electricity crisis six years ago.

“What this industry needs to make big profits and what consumers need to have reasonable prices are very different things,” said Judy Dugan, research director for the Foundation for Taxpayer and Consumer Rights.

Oil industry representatives say they have no incentive to withhold supplies. Every unexpected shutdown or glitch forces the companies to buy extra gasoline on the wholesale, or spot, market to fill customer orders. Spot market prices in Los Angeles have jumped as a result, rising from about $1.55 per gallon at the start of the year to $2.39 now. Plus, the refineries must continue to pay their workers and sometimes hire extra maintenance personnel.

“All the overhead still stays,” said Joe Sparano, president of the Western States Petroleum Association. “It is not a good condition to be shut down.”

Numerous government agencies have investigated refinery profit margins and production and found no wrongdoing. Former California Attorney General Bill Lockyer subpoenaed financial documents from the state’s refiners last year after a sharp profit spike last spring. His successor, Jerry Brown, said the case remains open.

“It comes down to this: There’s a scarcity, and the question is whether it’s a real scarcity or if it’s being constructed,” said Severin Borenstein, director of the University of California Energy Institute.

Figuring out the answer is practically impossible, he said. All the maintenance delays and production problems could be real. Or refineries could be doing little things, bit by bit, to limit California’s gasoline supply, he said.

“If somebody told them, ‘Use your market power,’ this is how they’d do it,” Borenstein said.

Rising refinery profit margins, especially on the West Coast, are one of the reasons oil companies have posted record profits in recent years. For example, San Ramon’s Chevron Corp. recorded 2006 earnings of $17.14 billion, its largest ever, boosted in part by refinery operations.

Californians pay more than the national average for gasoline largely because they use their own special formula of gas, which is designed to fight air pollution.

A limited number of refineries make California’s gas. Those refineries, in turn, belong to a handful of companies. Chevron, for example, controls roughly one quarter of the gasoline refining within the state.

With a tight balance between supply and demand, the state’s gas prices tend to stay higher than the national average and suffer through more severe price swings.

Not that the balance is much better elsewhere. The whole country saw a wave of refinery closures in the 1980s and 1990s as companies shut down facilities with profit margins they considered too low. That, to oil company critics, proves the companies’ intent to squeeze U.S. drivers.

“As an industry, they made a decision in the early ’90s to reduce capacity,” Dugan said. “None of this is necessary.”

No refineries have been built since 1976. But existing refineries have been slowly expanding their production. Bay Area refineries, for example, have plans to expand capacity by 1.1 million gallons of gas per day, about 2.5 percent of the 43.5 million gallons Californians use each day.

The expansion, however, has not kept up with the growing U.S. demand for gasoline. Although gas sales dipped last year, they have grown this year, rising about 1.2 percent in the last month when compared with the same period last year.

The California Energy Commission keeps tabs on the state’s refineries. Commission staffers talk with refinery executives on a weekly basis and receive updates on maintenance or unexpected production problems, said commission spokeswoman Susanne Garfield.

But the commission has no policing power over the refineries and does not inspect them to make sure the refiners’ information is correct, she said.

Garfield agreed that refiners don’t have a reason to withhold supplies, pointing to the problems they face if they have to buy on the spot market because they aren’t turning out enough gasoline themselves.

“Those who are not producing have to buy,” Garfield said, “and no one wants to buy when prices are this high.”

Consumer Watchdog
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