CBC: High crude oil prices bite into refiners' profit margins
Published: Thursday, April 17, 2008 | 7:44 PM ET Canadian Press: Lauren Krugel, THE CANADIAN PRESS
CALGARY - Many drivers are frustrated about how much the cost of gasoline has gone up, but experts say the price that refiners pay for crude oil - now trading around a record US$115 a barrel - has risen even faster.
While Canadians were on average paying $1.21 per litre on Thursday, compared to about $1.08 at this time last year, Edward Jones analyst Lanny Pendill said pump prices have not even come close to catching up with refiners' soaring costs.
"So the net impact has been the profitability at the refineries has declined significantly from last year's levels," he said.
"The refiner, in essence, is absorbing some of that cost increase of oil."
When integrated oil companies such as Imperial Oil Ltd. (TSX:IMO), Petro-Canada (TSX:PCA) and Husky Energy Inc. (TSX:HSE) start reporting their earnings next week, Pendill said he expects their exploration and production profits to be boosted significantly by the rising price of crude oil.
"But that strong performance will be partly offset by less profitability in the refining operations because of the relationship of oil prices rising faster than prices at the pump," he said.
Even without the price of their raw product going up, refineries are still costly operations to build and to run, said Ted Stoner, vice president of the Canadian Petroleum Products Institute, which represents companies on the manufacturing and retail side of the oil industry.
"For someone to manufacture gasoline or diesel ... you're talking about billions of dollars in investment," he said.
"One would wonder why would someone even want to get into this business. It's so capital intensive."
The complex machinery at refineries needs to be regularly maintained so that service stations can be guaranteed a steady supply of gasoline. That means they have to be shut down from time to time so that workers can make repairs.
But unplanned outages have been a big problem in recent months.
"Reliability is the key. You have to keep it running," Stoner said.
In February, a malfunction at Imperial's 187,000-barrel-a-day refinery near Edmonton caused Esso stations across Western Canada to run out of gasoline. Production at the facility finally came back on line last week.
Royal Dutch Shell PLC experienced a similar issue at its Scotford refinery near Edmonton.
Pendill said part of the problem is that no new refineries have been built in more than 20 years, while demand has gone up substantially.
"In order to meet ever-increasing demand they're running these refineries harder and harder to try to keep up and when you do that, you're going to have some operational upsets," he said.
But demand may soon weaken as a result of the economic slowdown in the United States, Pendill said, which could eventually lead to some relief.
"It makes it a lot harder to increase those prices at the pumps when consumers are less and less able to pay for the increase," he said.
"The question is: Are we going to see the weakness in the markets actually cause that? And how soon do we see that? That's kind of up in the air."
Liberal MP Dan McTeague, a longtime critic of Canada's oil and gas industry, predicts gas prices across Canada will go up as much as three cents per litre tonight and that "profit taking by refiners" will be to blame.
"There is no rhyme or reason for what is driving this price. We have to finger the refinery, the oil industry, the major four oil companies in Eastern Canada, who are producing the product and who are simply taking advantage of a very, very difficult situation, no doubt compounding problems for the economy," he said.
Market Data 
Markets 
AI
