In a recent post Marita Noon posed the question "Oil’s Down, Gasoline Isn’t. What’s Up?" My first inclination was to answer her question in the "comments" sections. Then I realized that the question has enough widespread interest to justify presenting the answer in a wider post rather than just in a comment. Here is my answer to her question. Refiner's profits are up.
We deal with a host of misconceptions on a daily basis. The subject of gasoline prices is no exception. It is commonly believed, almost to the point of universal acceptance, that the price of gasoline at the pump is a direct function of either supply or demand or refiners' cost. It can be shown that, in reality, it is neither. I shall provide proof thereof.
The simple, undeniable fact is that the price of gasoline is, basically, whatever the refiner and the retailer can impose upon the public. Neither cost, availability, nor reason dictate that price. If threats of shortage, or impending hurricanes, or wars in the Middle East or assassinations of dictators allows the seller to convince the public that the price must go up, up it will go. And the public, referred to by our Oilpro associate Paul Jackson as "sheeple", will throng to the pumps to pay the inflated price. Further, when the esteemed CEO's of our major oil companies are called upon by Congress to explain the high prices, they will point to "the market" as the determinant of price, thereby shunning any responsibility for the prices that they, themselves, approve for the company's sales.
As prima facie evidence that my assertions are valid, I present the following chart covering the past dozen years. This chart displays the difference between the price of domestic crude, expressed as WTI, and the wholesale price of gasoline in the US. This differential is commonly referred to as the "refiner's margin". By utilizing margin rather than price I eliminate any impact of rising and falling crude prices.
This refiner's margin embodies two main elements -- operating cost and profit. For practical purposes, the operating cost element can be considered to be essentially constant since the cost of the raw material, crude oil, has already been deducted. Quantitatively this operating cost is on the order of 10-15¢/gal, shown as a solid horizontal line on the chart. The difference between this 15¢ and the value represented by the line, the wholesale margin, is the refiner's profit.
Two facts are immediately obvious. 1) No constant relationship, or even a pattern, exists between the refiner's cost and his selling price. It appears to be random. Some of the spikes are identifiable, such as hurricane timing, but some are essentially random in nature. 2) The refining profit portion of the margin appears to be dramatically excessive for long periods of time. If a 10-20¢/gal margin is a reasonable level, how can the industry justify profit levels of 50-75¢/gal which occurred numerous times for months on end? I suspect that if a CEO appeared before a congressional committee and the questioner knew enough to ask incisive and probing questions, the CEO would end up with the proverbial egg on his face.
The end of the line on the right hand side of the chart represents today's numbers. Refiners have recently been charging prices that result in margins of 60-70¢/gal, which produces profits of 45-60¢/gal -- pure profit. That number is more than $20/B, or half of some producers' total selling price for their production. Does something seem amiss?
This extraordinary refiners profit is the answer to Marita's question of "What's up?" Refiner's profit is up. Costs aren't up, but profits are up.
I expect some blowback to my simple explanation. I only request that any dissenting responder provide data, as I have done, as substantiation of your position. You might provide, in addition, your explanation for the dramatic margins that the data display.