Alon USA Energy Inc. (ALJ)

[sumisu]

Oil Refiners See Profits Sink as Consumption Falls


Recent protest by truck drivers in Washington/ Alex Wong/Getty Images

By JAD MOUAWAD

Published: May 14, 2008



http://tinyurl.com/5qz6op

While drivers are facing sticker shock at the pump these days, here is a bigger shock: high prices are putting a strain on oil refiners.

Valero, an independent refiner, said its first-quarter profit fell by 76 percent. Above, the company’s refinery in Paulsboro, N.J.

After last year’s stellar profits, American refiners are going through a traumatic period. In a time of record gasoline prices, some of them actually lost money in the first quarter, and for virtually all refiners, profits are down sharply.

Experts say the refiners are caught in a double bind. The price of their raw material, oil, is rising because of strong global demand. At the same time, consumption of gasoline in the United States is falling as a result of slower economic growth and consumer efforts to conserve.

However much the companies would like to raise gasoline prices enough to pass along the full increases in oil, analysts say they have been unable to do it. Oil prices doubled in the past year, while wholesale gasoline prices rose a mere 39 percent.

“Refiners are having a terrible time,” said Lawrence J. Goldstein, an economist at the Energy Policy Research Foundation.

For decades, global oil prices were tightly coupled to the ups and downs of the American economy. But in recent years, world oil prices have been pulled upward by heavy demand for diesel fuel from developing countries like China. American economic growth weakened in the last few months, but that has mattered little in the upward march of oil prices.

“What we see at the gasoline pump is increasingly driven by what is happening elsewhere in the global economy,” said Daniel Yergin, the chairman of Cambridge Energy Research Associates, a consulting firm.

Gasoline prices rose on Tuesday to a nationwide average of $3.73 a gallon, according to AAA, the automobile club. That is yet another record. Diesel prices also set a record, at $4.39 a gallon. Crude oil futures closed at $125.80 a barrel, up $1.57, or 1.3 percent, on the New York Mercantile Exchange.

In its latest monthly report, the International Energy Agency, an adviser to industrialized countries, reduced its forecast for global oil demand for this year, as consumption drops by a bigger-than-forecast 300,000 barrels a day in the developed world.

But that decline will be more than offset by growth from developing countries. Consequently, global consumption is expected to rise this year by 1 million barrels a day, to 86.8 million barrels a day. Nearly all that growth will come from China, the Middle East and Russia.

In the United States, there is no longer much doubt that consumers are responding to higher fuel costs by driving less. Oil consumption fell by 3.3 percent in March, compared with March of last year.

But even as gasoline demand softens, the price keeps rising, driven by higher oil prices. The cost of oil represents about 75 percent of the price of gasoline at the pump, according to the Energy Department; state and federal taxes account for 12 percent, and refining and distribution make up the rest.

The rising oil prices have led to a sharp drop in refining profit margins, or the difference between the cost of oil and the cost of gasoline. These margins, at $12.45 a barrel on average, are 60 percent below their year-ago level, and in the lower half of their five-year range, according to a report by UBS.

In response to falling gasoline demand and rising costs, refiners have cut their production rates. Refining utilization rates, for example, slumped to a low of 81.4 percent in the second week of April, compared with 90.4 percent at the same time last year. Earlier this month, refineries were running at 85 percent of their capacity.

All this has translated into a tough quarter for some refiners. While large integrated companies, like Exxon Mobil, reported big profits in the first quarter thanks to their oil sales, smaller independent refiners that buy their oil, instead of producing it themselves, have been losing money.

Tesoro, Sunoco, and United Refining all posted losses in the first quarter. The hardest hit have been small refineries that tend to process the most expensive types of crude oil into gasoline. Sunoco, for example, lost $123 million in the first quarter, while Tesoro posted a $82 million loss for that period, in contrast to a profit of $116 million last year.

“We’re just not able to pass along the increased cost of crude oil on the gasoline side,” said Lynn Westfall, the chief economist at Tesoro.

At Valero, the nation’s largest independent refiner, first-quarter profit melted by 76 percent. Its refining capacity allows it to process heavier grades of crude oil that typically trade at a discount. Still, its profit dropped to $261 million in the first quarter compared with $1.1 billion last year.

Some consumer advocates say they are deeply suspicious about the behavior of refiners who are sharply cutting production at a time of record gasoline prices.

“They are not sitting in a boardroom and colluding, but they can see easily enough where their benefit lies, and it doesn’t lie in a price war,” said Judy Dugan, the research director at Consumer Watch. “In a truly competitive market, you might see some of these providers try to improve their market share by reducing prices. But this is not happening. They are all better off by restricting production to keep prices up.”

Mark Cooper, director of research at the Consumer Federation of America, said mergers in the 1990s had cut the number of refiners in the country and contributed to reduced competition in the refining market.

“We let them accumulate market power through the wave of mergers, and we’ve been paying the price in the last five years,” he said. “If there is a small number of players in the market, they learn from each other’s behavior.”

The demand for diesel has been one of the main drivers of oil demand in recent years. Diesel and other so-called middle distillates are used as transportation, power generation and industrial fuels.

In China, for example, oil imports have surged in recent weeks, a signal that the government is stockpiling oil and diesel in anticipation of the Olympic Games. Beijing, the International Energy Agency report said, is seeking to avoid a repeat of the embarrassing fuel shortages and power disruptions that plagued the country last year.