OIL INDUSTRY Producers make big profits from high gas prices

Refineries, not gas station owners, profited from price increases.
KNIGHT RIDDER NEWSPAPERS
ST. PAUL, Minn. -- With gasoline prices falling steadily over the past week or so, service station owners must be crying in their tub-sized soda pops, right?
After all, those record high gas prices must have translated into bountiful profits.
Well, they have, but not for gasoline retailers. In the economics of the gasoline market, retailers -- though they field the ire of consumers for rising prices -- actually are often better off when gasoline prices are falling.
The big winners in this spring's big run-up in gasoline prices are crude oil producers and gasoline makers.
"Refining margins have been phenomenal," said John Kingston, director of oil at Platts, the energy information division of publisher McGraw-Hill. "It's been a great year for refiners."
How great? The "Gulf Coast 321 Crack Spread" -- a gross profit margin measure -- has been two or three times more than normal in recent months, said Gene Gillespie, an oil stock analyst at Howard Weil, an investment bank in New Orleans.
Spread explained
Normally, that spread is around $4 per barrel, but it's been in the double digits in recent months, he said. (The spread measures the margin between the price of a barrel of crude oil and a barrel of refined oil products.)
Meanwhile, gasoline retailers' profit margins have been -- until very recently -- falling.
Normally, a retailer's gross profit margin is about 8 or 9 cents per gallon, although about 3 cents of that is eaten up by processing fees on credit-card purchases, said Tim Hamilton, a petroleum industry consultant and head of a gas station trade group in Washington state.
When the wholesale cost of gasoline starts rising, retailers adjust by raising their prices. But they can't raise them enough to cover their rising costs, so their margins fall by 2 or 3 cents per gallon, Hamilton said.
That's because though the global oil business -- the realm of OPEC, ExxonMobil and Royal Dutch Shell -- may be a comfy clique, the retail gas business is a battleground for scads of independent operators. Many make more money selling Twinkies and fixing tires than they do peddling gasoline.
"It is very competitive on the retail level," Kingston said. "It's really hand-to-hand combat on the street."
About refineries
The refining industry is much more highly concentrated than gas retailing, and the supply of refineries is tight. U.S. refineries are operating at about 95 percent capacity.
Refiners say they can't add more capacity because U.S. environmental laws make building plants too cumbersome and costly. Critics say refiners won't add more capacity because by keeping supply scarce, they can boost profits.
Both would agree the past few years have been good ones for refiners. But the industry was seen as a laggard for years before that. "For about a decade, refining was one of the worst sectors for return on capital of all U.S. industries," Kingston said.
Even now, refining is a more volatile part of the oil industry than is crude oil production. It hits higher highs, but also lower lows.
Over the past decade, several major oil companies divested part of their refining operations or spun them off into joint ventures.
Up until fairly recently, stock analysts also were quite bullish on oil refiners and producers. But many are cooling off on the sector.
As one investment company, Friedman Billings Ramsey, said in a recent report, refining stocks are trading at "peak-cycle multiples" -- Wall Street-speak for they're no bargain and investors might want to sell some shares and lock in profits.