SUPPLIERS REAP GASOLINE PROFITS

The Arizona Republic

The handful of national oil companies that supply the Phoenix area with gasoline are generating record or near-record profits that have risen even faster than the soaring prices at the pump.

From 2002 through 2003, the average price of unleaded regular gasoline in Phoenix rose 38 cents per gallon, or 29 percent. Nationwide, it rose 13 percent. During the same period, the combined profits for five of Arizona’s largest suppliers — Valero Energy, ChevronTexaco, ConocoPhillips, BP plc and ExxonMobil — rose 99 percent, according to regulatory filings. And some companies saw profits surge more than 500 percent. Early first-quarter results show that trend is likely continuing.

There are several reasons why profits have risen, including growing demand and refiners coming off of a relatively low-profit 2002. In the Phoenix area, drivers are paying among the highest prices in the nation. The prices are due partly to a unique summertime blend of fuel. The special formula, meant to keep the air cleaner, has sparked supply problems, although state lawmakers are trying to change that by aligning the gas used in Maricopa County with that of California and other states.

Demand for gas in the Valley is being driven by the fast-growing population, spread-out development and limited public transportation.

Duane Yantorno, air and fuel program director for the Arizona Department of Weights and Measures, estimated that Valley drivers go through about 4.6 million gallons of formulated gasoline every day. Based on that, the 38-cent increase at the pump translated to additional revenue of $1.7 million per day.

The higher revenue here and in other states has translated into higher profits, despite a rise in crude oil prices.

For instance, Valero, which operates refineries in California and Texas, saw its profits jump 580 percent in 2003 from the previous year, to $621.5 million.

Net income at ConocoPhillips, supplier of CircleK and Phillips 66 stations, rose to $4.73 billion in 2003 from a $295 million loss in 2002.

John Felmy, chief economist with the American Petroleum Institute in Washington, D.C., said the numbers can be deceiving because 2002 was a particularly difficult year for refiners. Company filings show that in 2002 the combined net income of the largest refiners declined 45 percent, although all but one, ConocoPhillips, were still profitable.

Felmy noted that industrywide the return on sales for oil companies was 6.4 percent in 2003, compared with 6.5 percent for all U.S. businesses. The figures for some companies also include profits due to the 30 percent run-up in crude oil prices since 2002.

But all of the companies reported significant increases in refining margins and profits in 2003. ConocoPhillips saw its refining and marketing profits increase 790 percent in 2003, and Chevron Texaco reported a 221 percent increase.

The trend is expected to continue in the first quarter as a result of even higher prices for crude oil and gasoline.

San Antonio-based Valero, which distributes to Diamond Shamrock and other independent Valley stations, said it expects to report first-quarter earnings of $1.75 per share, up 73 percent from the fourth quarter of 2003. The company attributes the higher earnings to improved refining margins that more than cover rising crude oil prices.

Jeff Stevens, an executive vice president for Western Refining in El Paso, said the problems in 2001 and 2000 were due to the refiners’ inability to pass rising crude oil prices along to consumers. He said that relatively high gasoline reserves and sluggish demand, due partly to the Sept. 11, 2001, terrorist attacks, put a damper on wholesale and retail prices. Western and two smaller refineries in Texas produce about 40 percent of the gasoline consumed in Maricopa County.

The damper has gone away. Low reserves and an insatiable demand for gasoline are allowing refiners to charge more for their products.

“Sometimes you’re able to pass on your costs, and sometimes you’re not,” Stevens said.

David Cowley, a spokesman for AAA Arizona, agrees that a strong demand for gasoline is a major factor keeping prices up. AAA tracks the gasoline industry in Arizona and has seen no decrease in demand for gasoline because of higher prices.

Because no new refineries have come on line in decades, demand for gasoline in the West now exceeds local supply. The gap has to be made up by foreign imports. Some of the Valley’s unique blend of gasoline is refined in Singapore.

“I’m not a defender of big oil, but if we focus too narrowly on oil companies’ profits, we lose sight of the big picture, which must necessarily include the high demand for refined products,” Cowley said. “If I were going to blame the oil companies, it would be for not keeping their production up to the level we need.”

Jamie Court, president of the Foundation for Taxpayers and Consumer Rights in Santa Monica, Calif., calls the refiners’ profits outrageous.

Court’s group recently published a report that correlated oil company profits with retail gas prices. Court found that from 2002 to 2003, a 31 percent increase in gasoline prices translated into a 90 percent increase in profits at the five largest oil companies in California.

Court believes the refiners are working to keep supplies tight and prices high.

“They are keeping supplies tight so that any refinery outage or pipeline break causes price spikes,” he said.

Felmy called Court’s theory ludicrous. He pointed to numerous federal and state investigations that found no evidence of collusion among oil companies.

Court cited the tight gasoline market in California and a recent decision by Shell Oil to close its refinery in Bakersfield, Calif.

Court said that Bakersfield is Shell‘s most profitable U.S. refinery. “The refining margin is running about $23.01 per barrel, or about 55 cents profit per gallon,” he said.

“Only an oil company that wants to short the market and artificially drive up the price of gasoline would demolish a highly profitable refinery rather than sell it.”

Shell spokesman Cameron Smyth said the company is closing the plant because it could not guarantee a long-term supply of crude oil to feed it, not because it is unprofitable.