Oil companies, consumer groups spar over where profits should be pumped

The San Diego Union-Tribune

If the business world compiled an all-star profits team, it would be dominated by oil companies.

Since 2001, the world’s top five petroleum companies have reported more than $230 billion in profits, with some of the strongest gains coming as oil and gasoline prices spiked in the past year.

Chevron‘s 2004 earnings, for example, rose 85 percent over the previous year. ConocoPhillips posted a 72 percent gain for the same period.

Though Chevron‘s earnings growth cooled to 4 percent in the first quarter, earnings increases for ExxonMobil, Royal Dutch/Shell and BP were 35 percent or more, profits at ConocoPhillips grew 81 percent.

Industry representatives say the record profits should be considered in context of overall sales. Rayola Dougher of the American Petroleum Institute, an industry group, said oil profits have recently amounted to 7.9 percent of sales, compared with 7.4 percent for American businesses overall.

Dougher also said much of the earnings are returned to corporate shareholders or used for making the large investments required for their businesses.

Watchdog groups say the growing consolidation of the industry through mergers has put the major companies in a position to extract exorbitant profits at the expense of customers.

Tyson Slocum, energy research director for Public Citizen, a consumer advocacy group in Washington, D.C., also said much of the profits are being used for further consolidation rather than needed investment.

The cost of consolidation to consumers is most evident in refining, he said. Slocum noted that he was in rare agreement with President Bush when the president said recently that the nation’s tight refinery capacity was a key factor in high gasoline prices.

“Bush’s analysis is correct,” Slocum said. But he added that he disagreed with the president’s solution.

The president called for easing regulations that he said make building new refineries difficult. Bush also said closed military bases should be considered as sites for new refineries.

Refinery capacity must grow to keep pace with burgeoning demand, Bush said.

Public Citizen says an investigation is needed into what it alleges has been the industry’s strategy of reducing refinery capacity to limit supplies.

The advocacy group also recommends raising vehicles’ fuel economy standards to reduce gasoline demand and increase the national gasoline storage capacity, which could make attempts at limiting supplies more difficult.

No one denies that the painful run-up in gasoline prices has been largely caused by the spike in the price of crude oil, the cost of which accounts for 50 percent of gasoline pump prices. Oil companies have generated a hefty share of their record profits from the increase because production costs have remained constant as the price of crude has risen.

Another factor inflating the price of gasoline is the growing profit margin in refining.

Bob Slaughter, president of the National Petrochemical & Refiners Association, said 12 percent to 20 percent of the final cost of gasoline typically goes to refiners. The industry’s share of the pump price has grown in recent years, reaching 20.9 percent last month, according to government data. Moreover, the higher percentage comes with gasoline prices far higher than in the past.

John Felmy, chief economist for the American Petroleum Institute, said the overall rate of return from refinery investments in the past 20 years has been poor. But Felmy acknowledged that refinery profits have risen sharply in recent years.

The surge came after mergers and consolidations led to the closure of some refineries and greater utilization of remaining facilities.

“Clearly, we’ve seen some pretty good margins as some refinery companies have been able to pick up assets and gotten tremendous returns,” Felmy said.

But he insisted that the refinery business still generated relatively low rates of return because of its capital costs.

“If you look at the amount of money a refinery makes on a dollar, it’s about 3 cents,” he said.

The federal Energy Information Administration, a unit of the Department of Energy, said refiner margins on gasoline nearly doubled to 32 cents per gallon from 1987 to 2003, the last year in which the agency did the calculation.

Over the past half-century, the number of refineries in the United States fell by more than 50 percent. But the industry is producing far more gasoline than it did in the past because it increased the utilization of refineries from about 70 percent of capacity to more than 90 percent.

During a recent week, for example, the industry reported gasoline output equal to 94 percent of its domestic maximum capacity.

“That is going pretty much as hard as you can,” Felmy said.

Refinery shutdowns and growing demand have caused the United States to begin importing gasoline and other oil products. In fact, the nation imports 7 percent of its refined petroleum products, including gasoline.

A General Accounting Office study last year found that the wave of consolidations that swept the petroleum industry contributed to rising gasoline prices. The report was heavily criticized by the Federal Trade Commission, which approved many of the mergers. But the GAO report is cited by critics of the oil industry as evidence of how monopolization has raised prices for motorists.

Although running domestic refineries at high utilization rates has led to greater profits, Felmy insists it is still in the industry’s interest to build more refineries.

“Absolutely, because demand for refined products is going to grow,” he said.

Slocum of Public Citizen said nearly all the refineries that shut down in recent years were owned by small, independent companies. That has led to greater market control by the big refining companies.

“The big companies aren’t interested in building new refineries,” Slocum said.

Slaughter, of the national refiners’ association, does not disagree.

Asked why companies have not added refining capacity as demand for gasoline has risen, the trade group president said it is simple economics.

“The return on investment in the refining industry has not been anything but ordinary until the last couple of years,” he said.

He emphasized that refineries require huge capital expenditures and that the industry had invested $50 billion over the last decade on environmental upgrades alone.

A company considering building a refinery would have to determine whether the next 20 years will be like the last two years or like the lackluster years of previous decade, Slaughter said.

“This is a cyclical industry,” he said.

Slaughter said companies wanting to build refineries face daunting hurdles. Investors behind the only U.S. refinery project now proposed began filing for permits in 1999 and have yet to begin construction.

Arizona Cleans Fuels Yuma LLC proposes to build the first new U.S. refinery in some 30 years. Ian Calkins, a spokesman for the venture, says it hopes efforts by President Bush and an energy bill in Congress can expedite the project, but investors believe construction won’t begin until at least late 2006 or early 2007.

“Everyone sees the opportunity, but virtually no one wants to go through the rigor of the permitting process,” Calkins said. “There are few private investors that are patient enough. They will not see a penny of return for at least 10 years.”

The energy bill recently passed by the House would streamline the process of approving refineries and restart those that have been mothballed.

In California, there is little prospect of refineries being built because of community opposition and burdensome regulations, a spokeswoman for the Western States Petroleum Association said.

Environmental regulations had driven many smaller refiners out of the business a decade ago, association spokeswoman Anita Mangels said. The regulations helped clean the air but made the business more difficult.

“The regulatory climate is very burdensome,” she said.

Jamie Court, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica, said regulations aren’t the key issue in California, where he said the far-flung industry is generating its highest profits.

“This is an industry where companies work in unison to keep supply and inventories low, so the price of their commodity stays high,” he said.

Court said the only solution was state control over the industry, requiring adequate investment in new refineries while providing a reasonable rate of return to companies.

“That’s what we did with the electric industry before deregulation and what we’re doing there again after the failure of deregulation,” Court said.

Supporters of the House energy bill say the United States could again produce all the refined petroleum products it needed if the legislation becomes law.

Dougher of the American Petroleum Institute says motorists should keep in mind that oil companies earn little more than 15 cents from each gallon of gasoline that is sold. She also said motorists should remember that profits enable the companies to develop more production.

But it’s a lack of investment that worries Claude Mandil, executive director of the International Energy Agency, a Paris group that seeks to track and coordinate energy consumption and policy for industrialized nations.

He says a huge investment will be required in coming years to keep up with energy demand growth.

“Prices are still very high (worldwide),” Mandil said. “That should result in more investment in supply and refining and more response in demand. Neither of those effects seems to appear so far.”
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Contact the author Craig Rose at: (619) 293-1814; [email protected]