Review shows refiners make more per gallon

Operating margins manage to climb at accelerating clip

Jeff Donn, Associated Press

Wednesday, July 26, 2006

While U.S. oil companies blame the global oil market for high gasoline prices, an analysis of pricing suggests it's not so simple: The run-up at the pump also comes from domestic refining, largely controlled by Big Oil.

In consultation with several economists, The Associated Press examined pricing trends since 1999, the start for the modern era of pricier gasoline. It found evidence that:

• The portion of gas prices tied to refining has ballooned all on its own, apart from oil.

• The suspicion of frustrated drivers is correct: After upward spikes, the price of gasoline drops more slowly than the price of oil - and someone pockets the difference.

The country's average price for self-serve regular gas climbed to a record high at just above $3 a gallon in this month, according to the Lundberg Survey.

Crude oil accounts for just under half the price of gasoline, the government says. And oil prices are subject partly to supply decisions of foreign oil powers and stiff demand in Europe and Asia.

However, many Americans remain dubious, even contemptuous, of industry claims that oil companies have little control over prices.

A big chunk of gas prices - almost a fifth - pays refiners who make gasoline from oil, and America's refineries have been increasing their prices, too.

Charges of refineries can be detected in what's known as their margin - the difference between what they pay for crude oil and what they collect for the gas they refine. Service station costs and taxes add to the final retail price of gas.

In a competitive market, when raw material gets more expensive, margins typically shrink, economists say. Not so in the oil business these days. Refiners have somehow managed to fatten their margins through years of rising oil costs.

Since 1999, their average margin has jumped by 85 percent, reaching 43 cents for June, according to AP's analysis of daily data from the New York Mercantile Exchange. That margin increased by just 20 percent in the seven preceding years.

Rayola Dougher, who oversees market issues for the American Petroleum Institute, says today's margins are helping refiners bounce back from leaner times of the 1990s.

"They're still as a sector struggling, but certainly the last few years have been looking good," she acknowledges.

Refining groups say they are doing their best to bolster supplies, which would ease price pressure. The industry has announced plans to expand domestic refining capacity by at least 8 percent over several years.

In fairness, the margin rise hasn't been all gravy for refiners.

Refining costs have escalated from environmental mandates, such as special gas blends mandated in particular places. Wild price fluctuations and hurricanes have added risk to business projects.

But refining margins also reflect profit. Some economists suspect that refiners have intentionally bottled up supply to buoy prices, margins and ultimately profits.

"It's simple economics," says Severin Borenstein, director of the University of California Energy Institute. "They (refiners) understand that putting more supply on the market drives the price down."

Bob Slaughter, president of the National Petrochemical and Refiners Association, blames high gas prices on high oil prices, "which are frankly out of our control" - not decisions by refiners to hold back on gas.

Why wouldn't other refiners ramp up their own output and claim a bigger slice of demand? That has become harder to do, as big refiners have built up market muscle through mergers.

There's another way for refiners to fatten their take: Once prices are up, keep them there.

An examination of gasoline and oil prices shows this tendency: Gas prices shoot up along with oil's but decline slowly, lagging drops in crude prices.

The AP analysis looked at weekly federal pricing data since September 1999. It found that a gallon of retail gas rose an average of 6 cents for a 10-cent rise in oil, but dropped only 4 cents for a 10-cent decline in oil - suggesting that gas temporarily resisted downward shifts more strongly than oil.

Refining groups suggest that gas stations may be offsetting losses they suffered earlier.

On the other hand, gas stations - backed by some market studies - say their skinny margins are hard to pad.

Then who would pocket from the lag in price decline? Economists suspect it's more likely the businesses that set wholesale prices charged to gas stations: the refiners.