Big Oil's blame game

by Jeff Donn

While US oil companies blame the global oil market for high gasoline prices, a close analysis of pricing suggests it's not so simple: The run-up at the pump also comes from domestic refining, which is largely controlled by Big Oil.
The Associated Press examined pricing trends since 1999, which was the starting bell for the modern era of pricier gasoline. It found evidence that:
-- The portion of gas prices tied to refining has ballooned all on its own, apart from oil.
-- The suspicion of frustrated drivers is correct: After upward spikes, the price of gasoline drops back slower than the price of oil, and someone pockets the difference.

The petroleum industry knows that many drivers are steamed about both its record prices and profits. In a recent television commercial by the industry's American Petroleum Institute, a driver wonders "why world demand for crude oil determines what I pay at the pump?"
The industry wants Americans to know that the price of gas tracks the price of its chief ingredient, crude oil. Why? Oil prices are set on a world market, often beyond direct control of American petroleum companies.

The group has a point. Crude oil does account for just under half the price of gasoline, the government says. And oil prices are subject partly to supply decisions of foreign oil powers and stiff demand in Europe and Asia. However, many Americans remain dubious, even contemptuous, of industry claims.
"It's a bunch of bull. It's just to cover their behinds," said Fernando Reas, of Hartford, Connecticut, who was saving on gas this summer by vacationing nearer home at a trailer park on Cape Cod.

Consumers like Reas are right, at least, to suspect there's more to the story. A big chunk of gas prices -- almost a fifth -- pays refiners who make gasoline from oil, and America's refineries have been hiking their prices, too.
Charges of refineries can be detected in what's known as their "margin" -- the difference between what they pay for crude oil and what they collect for the gas they refine. Service station costs and taxes add to the final retail price of gas. In a competitive market, when raw material gets more expensive, margins typically shrink, economists say. Not so in the oil business these days. Refiners have somehow managed to fatten their margins through years of rising oil costs.

Since 1999, their average margin has jumped by 85 %, reaching 43 cents for June, according to AP's analysis of daily data from the New York Mercantile Exchange. That margin increased by just 20 % in the seven preceding years.
Rayola Dougher, who oversees market issues for the American Petroleum Institute, says today's margins are helping refiners bounce back from leaner times of the 1990s.
"They're still as a sector struggling, but certainly the last few years have been looking good," she said.

Refining groups say they are doing their best to bolster supplies, which would ease price pressure. The industry has announced plans to expand domestic refining capacity by at least 8 % in the next several years.
In fairness, the margin rise hasn't been all gravy for refiners. Refining costs have escalated from environmental mandates, such as special gas blends required in particular places. Wild price fluctuations have added risk -- and thus financing cost -- to business projects. Last summer's hurricanes also temporarily took out some operations.

But refining margins also reflect profit. Some economists and consumer advocates suspect that refiners have intentionally bottled up supply to buoy prices, margins and ultimately profits.
A 2002 congressional study found some evidence it happens, but that doesn't necessarily mean refiners huddled in a back room somewhere, hatching conspiracies. They don't need to. They can each simply decide to crimp output or hoard supply. Such margin goosing is a permissible bid "to maximize their profits," federal trade investigators said in a 2001 report.
"It's simple economics," said Severin Borenstein, director of the University of California Energy Institute. "They understand that putting more supply on the market drives the price down."

Bob Slaughter, president of the National Petrochemical and Refiners Association, blames high gas prices on high oil prices "which are frankly out of our control" -- not decisions by refiners to hold back on gas. But he also says, "There is no law that says you can make people in an industry invest and expand capacity."
Why wouldn't other refiners simply ramp up their own output and claim a bigger slice of unmet demand?

That has become harder to do, as big refiners have built up market muscle through mergers. The top five now control more than half of US refining capacity, and the top 10 account for three-quarters, according to an AP review of federal data. Most are petroleum powerhouses like ConocoPhillips, ExxonMobil and BP, which influence prices with operations across the supply chain, from drilling to pumping gas into cars.
"Your refining business -- because the market is more concentrated, you have far more control -- is going to be more profitable," said Tyson Slocum, an energy expert with the consumer group Public Citizen.

There's another way to fatten your take: Once prices are up, you can keep them there. An examination of gasoline prices relative to those of oil shows this tendency: Gas prices shoot up along with oil's but sputter down slowly, lagging behind drops in crude prices.
The AP analysis looked at weekly federal pricing data since September 1999. It found that a gallon of retail gas rose an average of 6 cents for a 10-cent rise in oil, but dropped only 4 cents for a 10-cent decline in oil -- suggesting that gas temporarily resisted downward shifts more strongly than oil.

Economists call the phenomenon "downward sticky" prices.

Then who would pocket "downward sticky" profits? Economists suspect it's more likely the businesses that set wholesale prices charged to gas stations: the refiners.