Some calling profits obscene

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Philadelphia Daily News

Having a hard time coughing up the $40 or more to fill up your tank with gasoline?

It would have been a lot easier if you’d had the vision a few years ago to buy stock in one of America’s big oil-refining giants, including Philadelphia-based Sunoco.

Shares of Sunoco have risen roughly five times in value since early 2003 — roughly the same time that gasoline prices began their long climb to records earlier this week. The stock closed yesterday at $76.98.

And it’s not just Sunoco. Rivals including Valero Energy – whose stock has risen more quickly in the last year than Google’s – report similar results. The reason: Those record-high gas prices have meant record-high profits.

Earlier this week, Prudential Equity Group said that refining margins – the amount of money the refineries make on the gasoline they produce – doubled in the days following Hurricane Katrina, to $28.04 a barrel. In 1997, the margin was just $4.40.

And why are the oil companies making so much money?

“Because they can,” said Robert A. Robicheaux, an expert on gasoline prices from the University of Alabama-Birmingham’s School of Management.

“It’s capitalism at its best — or at its worst,” said Tom Kloza, chief oil analyst at the New Jersey-based Oil Price Information Service.

Yesterday, the world’s largest oil company. Exxon Mobil, announced that its profits are now $110 million a day — up 60 percent from this time last year and putting the giant on pace for a $10-billion profit in just this quarter.

How does Big Oil defend profits that critics are calling obscene?

Industry officials say the money follows the laws of supply and demand — because the high prices that drivers pay at the pump are in large part determined by trading on the gasoline-futures market in New York. And those futures prices spike when there is a disruption in supply like Hurricane Katrina, which knocked out power to two large pipelines and closed eight refineries.

What’s more, they say that the oil companies’ profit margins were at a historical low during the 1990s, when gasoline prices were less than $1 a gallon, and that the new monies are needed to explore for new domestic sources of oil and to further expand refinery capacity in the United States.

“The big companies have a lot of money coming in, but they also have a lot of money going out,” said Mark Kibbe of the American Petroleum Institute, the industry’s chief lobby. He said the profit margin for oil companies was just 7.6 percent, slightly below the average for all types of U.S. companies.

That’s poppycock, counters Lance Haver, Philadelphia’s consumer-affairs chief and longtime industry critic. He wonders why gasoline prices at the pump doubled the same time that crude-oil prices rose by just 50 percent, and also why they’re charging so much for gas bought before Hurricane Katrina struck the Gulf.

“Why are the oil companies that don’t get any oil from the Gulf or from pipelines still raising prices?” Haver asked. “BP and Lukoil get all their oil from overseas and are vertically integrated with their own wells, pipelines, shippers, tanks, and distribution networks – and are also raising prices. They’re all colluding.”

Indeed, a liberal public-interest group, the Foundation for Taxpayer and Consumer Rights (FTCR), just this week released internal memos from Chevron, Texaco and Mobil during the 1990s suggesting there was an intentional effort to keep America’s gasoline-refining capacity down to boost profit margins.

Experts agree that the lack of refining capacity is a problem. No refineries have been built in the United States since the 1970s, in large part because of opposition from community and environmental groups. But in a sign of the changing times, FTCR actually went to court this year to keep a Shell Oil refinery in Bakersfield, Calif., open.

Robicheaux, the Alabama-based gas-price expert, noted that a series of mergers of major gasoline refining and marketing companies over the last decade was supposed to aid drivers by creating economies of scale. Instead, he argued, a drop in competition has tended to drive prices higher.

In particular, he noted, most major refineries also own service stations, and so by controlling pricing on both ends they make it difficult for thousands of independent retailers to compete without a profitable convenience store or car wash.

In the face of such powerful market forces, government seems powerless.

In the U.S. Senate this week, Sen. Byron Dorgan, a Democrat from South Dakota, introduced a bill that would levy a 50 percent excise tax on profits earned by the major oil companies on crude oil above $40 a barrel.

“Everyone expects American businesses to make a profit, and I don’t begrudge them that,” Dorgan said. “But the big oil companies are now reaping an unbelievable windfall, and it’s time for Congress to help consumers by giving them rebates funded by the excise tax.”

Kibbe, the oil-industry spokesman, said such a tax would only end up hurting American consumers by limiting future refinery expansions.

In a sign of how little Americans seem to trust the gasoline industry, Gov. Rendell recently suggested rolling back the state’s 30-cent per-gallon gasoline tax but doing it through a rebate when drivers register their cars because it’s so hard to know where the money is going at the pump.

Recent developments seem to dramatize that problem. Over the past few days, oil-industry officials have announced that four of the eight refineries closed by Katrina are reopening, and both pipelines that were initially knocked out are back on line.

In addition, announcements that the United States and Europe are reaching into their emergency stockpiles had dropped the price of crude oil below $65, or lower than it was before the hurricane.

And prices at the pump at some Philly stations are starting to go down – but not nearly as fast as the 50-cent upward spike that came immediately after Katrina struck.
Contact the author at: [email protected]

Consumer Watchdog
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