Profiteering at the Pump

"Who profits the most when gas prices rise " by Justin Blum for the Washington Post:
reprinted the Seattle Times
[excerpts; emphasis added]

When the average price of a gallon of regular gasoline peaked at $3.07 recently, it was partly because the nation's refineries were receiving an estimated 99 cents on each gallon sold. That was more than three times the amount they earned a year ago when regular unleaded was selling for $1.87.

Companies that pump oil from the ground swept in an additional 47 cents on each gallon, a 46 percent jump over the same period.

If motorists are the big losers in the spectacular run-up in gas prices, the companies that produce the oil and turn it into gasoline are the clear winners.

The spikes caused by Hurricane Katrina — which heavily damaged oil production and refining in the Gulf region — accentuated gains the refiners and producers already were enjoying over the past year.

Exxon Mobil, the Irving, Texas, behemoth that produces and refines oil, reported in July that its second-quarter profit was up 32 percent, to $7.64 billion. Analysts expect Exxon's profit to soar again this quarter.

The rapid run-up in prices at the pump when Katrina hit — and their slow decline — has infuriated drivers, many of whom complain that oil companies used the storm as a pretext for boosting prices and profits. Politicians, including Washington state Gov. Christine Gregoire, echoed that sentiment and are calling for investigations of the oil industry.

Rising pump prices and company profits have caused lawmakers on Capitol Hill to seek legislative changes. Sen. Byron Dorgan, D-N.D., has introduced a measure that would tax some oil-company profits that are not devoted to exploration and development of new production.
"They obviously are experiencing windfall or excess profits," Dorgan said of the big oil companies. "They are ... profiting in an extraordinary way at the expense of the American consumer."

Some environmental and consumer advocates are urging the government to lower oil-company profits in another way. They want to reduce demand for gasoline, which has been growing in recent years, by requiring vehicles to get better mileage.

Consumer advocates say mergers in the refining business have diminished competition and made it easier for the companies to limit supplies of gasoline and extract higher prices.

For a company such as Exxon, producing a barrel of oil from an existing well costs about $20, according to analysts. When the selling price exceeds that, the increase is almost all profit, they said. After Katrina bore down on the Gulf Coast, the price of oil set a record, approaching $70.
Refiners processing the oil into gasoline faced lucrative market conditions. They may have had to pay producers more for the oil, but they were able to sell gasoline for higher prices as a result of the short supply and the spike on the mercantile exchange.

Station owners complain that credit-card companies are benefiting from higher pump prices. Many of those companies charge a percentage fee to the stations based on the customer's total charge. So as customers' bills rise, so do the credit-card companies' fees. As prices have risen, station owners say, more people are using credit cards.

When prices rise quickly, as they did after Katrina, refineries make a larger share of the profit because they immediately pass along price increases to buyers. But gasoline suppliers and station owners typically move more slowly in passing along price increases, limiting their profit.
Conversely, as more gasoline supplies came on the market after Katrina, prices charged by refiners for their gasoline dropped rapidly. But gas suppliers and station owners did not pass those reduced prices along as quickly, a typical pricing pattern that allows them to make up for reduced profit margins when prices were rising, analysts said.

"On the way up, one guy is making money," said Michael Burdette, an analyst with the Energy Department's Energy Information Administration. "On the way down, the other guy is."