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Oil CEO fingers refining profits for higher gas prices

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I drive past the same gasoline station (er, “convenience store”; we don’t have gas stations any more) each morning en route to work. In January, unleaded regular cost $2.24 a gallon there. This morning, it cost $3.09 — a 38 percent increase.

So I’m pissed. And, if you live in the United States, where part of our genetic coding is imprinted with “drive anywhere any time in anything,” you’re pissed, too.

We have reasons, of course. “My income isn’t rising anywhere enough to offset that added cost” — particularly if we commute appreciable distances. “How come inflation is only about 2.5 percent this year (the lowest rate in four years) but gasoline price inflation is about 15 times that?”

And: “How come oil-company profits are so (insert favorite expletive here) high?” (ExxonMobil reported $39.5 billion in profit for 2006, the highest corporate profit ever.) And: “We’re getting screwed somehow.”

We smell conspiracies.
We think it must be price fixing. Big Oil CEOs get those really big salaries because they’re doing evil, unspeakable things — and Big Guvmint is helping them get away it. (See 2005 and 2006 (11th graf) CEO compensation.)

I used to be a reasonable man about this. In September 2006, I wrote that “we are such reactionary dopes when it comes to the price of gasoline.” In that post I explained — at length (or ad nauseum, depending of what you think of my blathering) — all the economic, political, geographical and psychological factors that affect the price of gasoline. No conspiracies exist, I counseled.

But that was at $2.49 a gallon at my local petroleum emporium, 60 cents less than it is now. And today on CNN’s American Morning news program, the president and CEO of Gulf Oil, Joe Petrowski, put the finger on refining costs.

It is refining profits that are at absolute record levels. Normally a refining margin to turn the crude into refined products is between 15 and 20 cents a gallon. … Refinery utilization has been particularly awful this spring. And that’s been a huge contributor factor, probably 30 to 40 cents in the price of gasoline. … I honestly think that prices will be cheaper on Labor Day than they are today and probably cheaper in a month or so. I think we really were hurt by some of the terrible spring turn around season in the refining business. Refinery margins of 80 cents a gallon are not sustainable.

(He said much more of interest. See the CNN transcript.)

But Gulf Oil, said Petroski, is only in the business of storage and downstream distribution of refined oil products. It is not a refiner of crude. My analysis of what he said is necessarily crude (I know, bad pun), but I gathered that he believes that the demand for gasoline this spring met with a constrained supply for reasons including barely adequate refining capacity, the necessity of boutique fuels that vary from state to state, turnaround times for changing heating oil and gasoline “blends,” hurricane damage and routine maintenance.

So what explains the really high refining profits that spike the retail cost of gasoline? And this isn’t a one-time spike. We’re all aware, especially after the past three years, of lower prices in January climbing swiftly to painfully high prices in July. When pricing becomes a recurrent cycle like this, why shouldn’t we be suspicious? I wish CNN’s bookers would browbeat a crude-oil refiner into going on air to explain this.

The federal government’s Energy Information Agency gasoline pricing primer says this about refining costs: “Refining costs and profits comprise about 19 percent of the retail price of gasoline.”

That doesn’t help. Without a definition of “costs” and “profits,” who’s to know what part of that 19 percent is which?

And Petrowski, I think, is saying that right now that percentage of price is much, much higher and is driving the current spike of retail gasoline prices.

I don’t know who to believe any more in the matters of petroleum pricing policy and problems. But I ain’t taking anything Big Guvmint and Big Oil say at face value any more.

xpost: Scholars & Rogues and 5th Estate


Written by Dr. Denny Wilkins

May 14, 2007 at 3:50 pm

Posted in Uncategorized

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