Oil CEO fingers refining costs for higher gas prices

I drive past the same gasoline station (er, “convenience store”; we don’t have gas stations any more) each morning en route to work. In January, unleaded regular cost $2.24 a gallon there. This morning, it cost $3.09 — a 38 percent increase.

So I’m pissed. And, if you live in the United States, where part of our genetic coding is imprinted with “drive anywhere any time in anything,” you’re pissed, too.

We have reasons, of course. “My income isn’t rising anywhere enough to offset that added cost” — particularly if we commute appreciable distances. “How come inflation is only about 2.5 percent this year (the lowest rate in four years) but gasoline price inflation is about 15 times that?”

And: “How come oil-company profits are so (insert favorite expletive here) high?” (ExxonMobil reported $39.5 billion in profit for 2006, the highest corporate profit ever.) And: “We’re getting screwed somehow.”

We smell conspiracies. We think it must be price fixing. Big Oil CEOs get those really big salaries because they’re doing evil, unspeakable things — and Big Guvmint is helping them get away it. (See 2005 and 2006 (11th graf) CEO compensation.)

I used to be a reasonable man about this. In September 2006, I wrote that “we are such reactionary dopes when it comes to the price of gasoline.” In that post I explained — at length (or ad nauseum, depending of what you think of my blathering) — all the economic, political, geographical and psychological factors that affect the price of gasoline. No conspiracies exist, I counseled.

But that was at $2.49 a gallon at my local petroleum emporium, 60 cents less than it is now. And today on CNN’s American Morning news program, the president and CEO of Gulf Oil, Joe Petrowski, put the finger on refining costs.

It is refining profits that are at absolute record levels. Normally a refining margin to turn the crude into refined products is between 15 and 20 cents a gallon. … Refinery utilization has been particularly awful this spring. And that’s been a huge contributor factor, probably 30 to 40 cents in the price of gasoline. … I honestly think that prices will be cheaper on Labor Day than they are today and probably cheaper in a month or so. I think we really were hurt by some of the terrible spring turn around season in the refining business. Refinery margins of 80 cents a gallon are not sustainable.

(He said much more of interest. See the CNN transcript.)

But Gulf Oil, said Petroski, is only in the business of storage and downstream distribution of refined oil products. It is not a refiner of crude. My analysis of what he said is necessarily crude (I know, bad pun), but I gathered that he believes that the demand for gasoline this spring met with a constrained supply for reasons including barely adequate refining capacity, the necessity of boutique fuels that vary from state to state, turnaround times for changing heating oil and gasoline “blends,” hurricane damage and routine maintenance.

So what explains the really high refining profits that spike the retail cost of gasoline? And this isn’t a one-time spike. We’re all aware, especially after the past three years, of lower prices in January climbing swiftly to painfully high prices in July. When pricing becomes a recurrent cycle like this, why shouldn’t we be suspicious? I wish CNN’s bookers would browbeat a crude-oil refiner into going on air to explain this.

The federal government’s Energy Information Agency gasoline pricing primer says this about refining costs: “Refining costs and profits comprise about 19 percent of the retail price of gasoline.”

That doesn’t help. Without a definition of “costs” and “profits,” who’s to know what part of that 19 percent is which?

And Petrowski, I think, is saying that right now that percentage of price is much, much higher and is driving the current spike of retail gasoline prices.

I don’t know who to believe any more in the matters of petroleum pricing policy and problems. But I ain’t taking anything Big Guvmint and Big Oil say at face value any more.

xpost: 5th Estate

Categories: Energy

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5 replies »

  1. Here’s the most remarkable part of it all, from my perspective. And I don’t know whether to interpret this as a sign that this is exactly what the oil industry says it is or that the conspiracy is completely in command of everybody. But I can’t help noticing that not a single presidential candidate is making hay of this. Not even cynical, we-know-this-is-all-bullshit hay. Nothing. Nada. Crickets chirping in the wilderness.

    Is it just me, or is that … odd?

  2. This may be a “plausible” explanation, Denny – but it’s part of the “big oil big lie” – I’m going to post something interesting in the next couple of days about why our gas prices are where they are – and it leads back to – oh, you know where the hell it leads….

  3. From a Monday Agence France-Presse story:

    “Gasoline prices have been rising sharply even though crude oil prices are well below their record highs set last year. Analysts said one reason is a backlog at refineries, unable to keep up with demand for motor fuel.” [emphasis added]

    (See it at

    (Also examine the Energy Information Administration’s weekly gasoline and diesel fuel price update at: Also see the EIA’s primer on gasoline markets and sources at:

    An exchange between business reporter Ali Velshi and anchor Kiran Chetry today on CNN’s American Morning:

    CHETRY: Right. Well, [Gulf CEO Joe Petrowski] thinks maybe by summer we’re going to see them go down because a bunch of these refineries that are out for repairs — which I don’t get why they’re out for repairs when everyone is about to travel — will be back up on line.

    VELSHI: That is the biggest problem, because our refineries run at over 90 percent capacity right now. We haven’t built any new ones, so there are a number of them. I think at last count last week there were 12 refineries out of commission for repairs, and that’s what a lot of congressmen are calling on an investigation into, is why these things have to be — they should be up and running more often, and they’re not.

    So that’s true. If they fix a lot of the refineries and no more go down, and we don’t have bad weather in the Gulf, we could see lower prices. [emphasis added]

    (See the transcript at

    From a New York Times story today:

    “The nationwide average price for gasoline has surged to a record $3.07 per gallon, according to the latest Lundberg Survey, surpassing the old mark of $3.03 per gallon set last August.

    “The big price spike has been blamed on unexpected refinery shut downs that have crimped supplies. Analysts are warning that consumers can expect further price increases.

    “Through the first four months of this year, consumer inflation is rising at an annual rate of 4.8 percent, almost double the 2.5 percent increase for all of 2006. The acceleration has occurred in large part because of higher costs for food and energy.

    “However, excluding energy and food, core inflation is up at an annual rate of just 2.2 percent through April, an improvement from the 2.6 percent rise in core prices for all of 2006.” [emphasis added]

    (See the story at:

    From a May 9 story [emphasis added]:

    “Oil prices sank over $1 Wednesday after a government report said supplies of gasoline, closely watched ahead of the summer driving season and running below average, rose for the first time in 13 weeks .

    “… U.S. crude prices have fallen over the last month, while oil company stocks, as measured by the AMEX oil and gas index (in yellow), have gained.

    “In its weekly inventory report, the Energy Information Administration said gasoline supplies rose by 400,000 barrels last week. Analysts were looking for a gain of 100,000 barrels, according to Reuters.

    “… Gasoline demand, which was higher than usual most of the winter, also appeared to ease.

    “EIA said demand over the last four weeks grew at a rate of about 1 percent. The normal rate of growth is about 1.5 percent.

    “Refineries, closely watched due to their abnormally low rates of operation, ran at 89 percent capacity last week, up 0.7 percent from the week prior, EIA said. Analysts were looking for them to run at 89.2 percent. [emphasis added]

    (See at at:

    From the American Petroleum Institute’s April 2007 “Energy Backgrounder”:

    2. Total imports in March 2007 as a percentage of total domestic petroleum deliveries: 62.7 percent (March 2006: 62.3 percent). [API]
    3. Persian Gulf petroleum imports in January 2007 as a percentage of total imports: 18.9 percent (January 2006: 15.9 percent). [DOE]
    4. Average price for a barrel of OPEC crude oil on April 6, 2007: $64.73. [DOE]
    5. Average U.S. refiner acquisition cost in February 2007 for a barrel of crude oil: $53.85. [DOE]

    (See it at:

    From an undated document called “The Facts on U.S. Gasoline Supply” posted some time in 2006 on the Web site of the National Petrochemical & Refiners Association:

    World oil demand growth is slowing due to slower economic growth. According to EIA, world oil demand growth is expected to be 1.7 million bbl/d in 2007. These estimates reflect a downward revision for the second consecutive Outlook in response to slower-than-expected demandgrowth in the OECD countries. Over half of the demand growth in 2007 is projected to come from two countries, the United States and China. Demand growth is also projected to be strong in the oil-exporting countries of the Middle East. In the U.S., economic growth has slowed slightly in the past year, decreasing the nation’s demand for energy, and allowing additional supply to become available at lower prices.

    Gasoline prices are falling. According to the EIA, the U.S. average price for regular gasoline was $2.19 a gallon as of February 5, a decrease of about 15 cents from the average price a year ago. Lower crude-oil prices, theseasonal decline in gasoline demand and the changeover from summer-grade to winter-grade gasoline, which is less expensive to produce, have all combined to lower gasoline prices. Gasoline prices remain volatile and any number of factors — ranging from refinery outages to geopolitical tensions in oil-producing countries – could push them up again.

    The free market system continues to work. The market has responded to higher prices by increasing supplies and decreasing demand. Due to the supply/demand situation and improving market conditions in 2005-2006, refining companies have announced plans to add between 1.4 and 2 million barrels per day of new refining capacity, much of which could be on-line by the end of 2010. This represents a likely increase of between 8 and 12% in refining capacity, which would bring total U.S. refining capacity to 18.6 millions barrels per day.

    Cleaner refineries and fuels come with a cost. An extensive overlay of intricate and changing environmental regulations has had a direct impact on refining capacity and ultimately supply. The phasing out of MTBE and the implementation of the renewable fuels mandate, the implementation of Tier II gasoline, and the ultra-low sulfur diesel (ULSD) program all confronted refiners and other fuel suppliers with major investment requirements and other challenges. Refiners have invested about $20 billion to reduce the sulfur content of gasoline and highway and off-road diesel.

    Focus should be on increasing supply to meet demand.The U.S. depends on imports to meet 60% of its crude oil demand. Increased access to domestic natural gas and oil supplies is essential to the nation’s economic well-being and national security. It is critical for Congress to pass meaningful legislation which will increase supplies of domestically-produced oil and natural gas, thereby keeping high-paying manufacturing jobs in the United States and increasing domestic energy security.” [emphasis in original]

    (See it at:

    From President Bush on May 14:

    ” … America has a clear national interest in reducing our dependence on oil. Over the past six years, my administration has provided more than $12 billion for research into alternative sources of energy. … We now have reached a pivotal moment where advances in technology are creating new ways to improve energy security, strengthen national security, and protect the environment.

    ” … I set an ambitious goal in my State of the Union: to cut America’s gasoline usage by 20 percent over the next 10 years. I … sent to Congress a proposal that would meet it in two steps: First, this proposal will set a mandatory fuel standard that requires 35 billion gallons of renewable and other alternative fuels by 2017. That’s nearly five times the current target.

    “Second, the proposal would continue our efforts to increase fuel efficiency. My administration has twice increased fuel economy standards for light trucks. Together, these reforms would save billions of gallons of fuel and reduce net greenhouse gas emissions without compromising jobs or safety.

    ” … With good legislation, we could save up to 8.5 billion gallons of gasoline per year by 2017, and further reduce greenhouse gas emissions from cars and trucks.”

    (See the White House press release at:

    From a Jan. 24 Boston Globe story:

    “The Union of Concerned Scientists calculated that to meet [Bush’s] 20 percent goal, the gas mileage for cars, SUVs, minivans, and trucks would have to increase to an average of 34 miles per gallon by 2017.”

    (See the story at:

    I calculate that American motorists use about 140.5 billion gallons of gasoline annually. Bush’s plan to cut usage by 8.5 billion gallons annual in 2017 — 10 years from now — would produce a reduction of only 6 percent.

    The United States’ population of 302 million would likely rise about 320 million in that year. Would that be enough to offset usage reductions predicted under Bush’s plan?

    “A man begins cutting his wisdom teeth the first time he bites off more than he can chew.”

    — Herb Caen