Tricks of the Capitalist Trader

Gasoline prices and the “free market”: Refiners profit after reducing capacity
By Joe Kay
May 31, 2007, 10:21

The recent sharp rise in US gasoline prices and the accompanying hardship for millions of people underscore once again the consequences of an energy market dominated by a few giant corporations. The price increase has been attributed to limited refining capacity, which has generated a sharp rise in refinery profits while facilitating market manipulation.

Gas prices in the US rose to record highs just in time for the Memorial Day weekend at the end of May, traditionally a time when many families drive long distances. Average gasoline prices reached $3.22 last week, approaching the record inflation-adjusted high of $3.29, set in 1981. In some parts of the country, prices rose considerably above that, with gasoline reaching as high as $3.69 a gallon in California.

The main beneficiaries of the surge in prices have been American refiners, which import crude oil and process it into gasoline and other products. Some of the major oil corporations, such as ExxonMobil and Chevron, are vertically integrated, combining oil extraction and refining operations. These companies have seen profitability of the refining portion of their business soar.

A Wall Street Journal article May 18 noted that refiners are pulling in more than $30 in profit before taxes and other expenses for every barrel of oil that they process, the most per barrel since the immediate aftermath of Hurricane Katrina in 2005. On the West Coast, where gasoline prices are higher than the national average, refinery profits are at $39 a barrel, more than double the average of $17 over the past five years, according to a March 9 report in the San Francisco Chronicle.

The large differential between the oil refinery revenues from the sale of gasoline and costs from the purchase of crude has been explained by shortages in refining capacity, which has reduced gasoline reserves as demand increases—leading to a rise in gas prices. All of the extra profit to the major refineries is coming directly out of the pockets of American consumers.

Bloomberg news service quoted Tom Betz, an oil broker with BNP Paribos Inc., as noting, “Probably stocks, based on demand, have never been lower in our history.” Demand is “very strong and is still rising as we head into driving season,” meaning that gasoline prices will stay high throughout the summer.

The rise in prices is hurting working class and lower-income families the most, as they have less disposable income to shift to transportation costs. This means that the high prices are cutting into other necessary spending, including food, prices for which are also rising throughout the country. An AP poll released May 25 found that 46 percent of the population said that high gasoline prices are causing severe financial problems.

The shortage of refining capacity is generally attributed in the media to a number of planned and unplanned refinery outages. However, refinery capacity has been deliberately decreased over the course of the past two decades, for the explicit purpose of boosting profit margins.

The Journal article notes, “For decades, there was too much refining capacity in the US, margins were crummy and many companies were closing or selling off refineries. In 1986, refiners made little more than $2 for every barrel they processed.” The newspaper quotes Fadel Gheit, a senior energy analyst of Oppenheimer & Co. and a former employee at Mobil, now part of ExxonMobil, as saying, “We used to commission studies to get rid of refineries. We wanted to give them away.”

Read the rest here.

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