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Refinery margins are the culprit

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Sat, Oct 20, 2007 at 2:06 pm

    Refinery margins are the culprit

    The Kansas City Star (Missouri)
    October 20, 2007

    by Steve Everly, The Kansas City Star

    Refinery margins have been an ally at the gas pump

    Drivers caught something of a break in recent weeks: Even as the
    price of crude oil surged toward $90 a barrel, gasoline prices actually
    drifted lower.

    Despite soaring oil prices, gasoline prices in Missouri are
    down 64 cents per gallon from where they were in May, when oil prices
    were lower than they are now.

    But don’t be too quick to give credit for this seeming bit of
    economic magic to the tooth fairy. Instead, ponder refinery margins.

    The margin is the difference between crude oil and wholesale
    gas prices and is an indicator of a refiner’s profitability. Those
    margins have been far more volatile than oil prices.

    Earlier this year, refining margins climbed more than 400
    percent, pushing gas prices higher in the spring and summer. Now,
    though, they’re in retreat, in part, because of a seasonal decline in
    gas demand. As a result, the decline in refinery margins has more than
    made up for the rise in oil prices in recent weeks.

    Unfortunately for consumers, the respite at the pump because of
    tighter refining margins has pretty much run its course. Now, pump
    prices are poised to more tightly track moves in oil prices, which have
    been spiking in recent days over growing concerns about Middle East
    tensions that could disrupt supplies.

    "Gasoline is going to have a tough time getting cheaper unless
    there is cheaper crude," said Steve Mosby, vice president of Admo
    Energy, a Kansas City firm that helps companies manage energy-price
    risks.

    Refinery margins can vary depending on the type of crude oil
    used, which can vary in cost, and differences in wholesale prices in
    different parts of the United States. But an average used by the
    industry shows the trajectory of refinery margins this year.

    Refining margins began their climb in February and by spring
    were topping $1 per gallon on some days. They are now just 12 cents per
    gallon.

    That volatility has been felt by retail pump prices.

    On May 21, when the margins were up sharply, the national
    average of regular gasoline was $3.21 per gallon. On the same day a
    barrel of West Texas Intermediate crude, the U.S. benchmark, was $66.27
    per barrel.

    On Monday, after the recent decline in refining margins, that
    barrel of crude was up to $86.13, but the national average for a gallon
    of gas was $2.76.

    Despite relief at the pump, some consumers wonder whether the
    declining margins are a sign that the oil companies are trying to head
    off congressional investigations. At the least, they contend, the sharp
    decline in the margins shows they were too high in the first place.

    "What we’re seeing is that refining profits were so high the
    market could absorb this oil-price shock," said David Peironnet, an
    area resident.

    But the oil industry counters that the declining margins simply
    show a marketplace at work. Put simply, margins fell as supplies of gas
    increased.

    Notably, Chevron Corp. recently announced that its third-quarter earnings would be down because of lower refinery margins.

    Still, the industry argues that because crude oil accounts for
    more than half the price of gasoline, it is the biggest factor in the
    rise and fall in gas prices.

    "Historically, there has been a strong connection between crude
    oil prices and retail gas prices," said Ron Planting, an economist for
    the American Petroleum Institute.

    But industry critics disagree. They say that refinery capacity
    over the years has not kept up with demand, and that gives oil
    companies the power to profit even more handsomely when demand rises.

    "Those record prices in the spring weren’t tied to the price of
    crude oil," said Judy Dugan, research director for The Foundation for
    Taxpayer & Consumer Rights. "The key factor is what amount of
    refining profit the oil companies are willing to seek and for what
    reasons."

    Despite fluctuating refining margins, crude prices still have a
    big impact on retail gas prices. Indeed, now that refinery margins are
    tight, the pump price is poised to be even more sensitive to any
    fluctuation in oil prices.

    Typically, with the higher demand of the summer driving season over, some relief in oil prices could be expected.

    But James Williams, an analyst with WTRG Economics, said oil
    prices have risen because of fears about possible supply disruptions
    stemming from rising tensions with Turkey and Iran. He noted there was
    little surplus capacity in oil production to replace lost supplies from
    the Middle East.

    The weakness in the dollar also is affecting oil prices.

    "Europeans have seen the price of oil double in the last five
    years while in the U.S. the price has almost tripled," Williams said.

    So far, consumers have been lucky that the recent rise in oil
    prices has come as refining margins ebbed. But observers are already
    thinking ahead to the spring, when refining margins typically rise for
    gasoline. The concern now is that oil prices and refining margins will
    peak at the same time.

    "They were really cutting a fat hog this summer," said Mosby of Admo.
    —————-
    To reach Steve Everly, call 816-234-4455 or send e-mail to severly@kcstar.com