Oil refiners are pumping up their profits

The Kansas City StarAugust 29, 2011 

Midwesterners are getting a hard lesson in oil-industry economics and paying for it at the gas pump.

The region’s refineries are paying 25 percent less for oil than they were a few months ago, but gasoline prices are down only about 10 percent. The refiners are basically keeping much of the difference — and reaping some of their best profits ever.

No one’s accusing the refiners of doing anything wrong or illegal. They’re just in a good supply-and-demand position.

•The price for West Texas Intermediate crude, the publicly traded oil that most closely tracks what Midwest refineries are paying, is down about one-fourth since May.

•Even cheaper oil is flowing from North Dakota and Canada, and until more pipelines are built, the Midwest refiners are its main market.

•On the demand side, however, there’s more of a world market for gasoline and diesel. It can be transported easily within the U.S., and the country is also exporting more of the fuel. So higher gas prices in Chicago — or even Europe — can help prop up prices in the Kansas City area.

As a result, refinery margins have been higher for a longer period of time than analysts say they can ever recall.

The margins — the difference in price between crude oil going in and wholesale gasoline and diesel coming out — are up for most refineries nationwide. But they have been especially strong for Midwest refineries, which have seen them climb above 70 cents a gallon. That’s more than triple what they were a year ago.

In fact, wholesale gas and diesel prices in the Midwest, often lower than the national average, have been among the highest in the country over the last month.

“Midwest refineries able to use the cheaper oil are making out like bandits,” said James Williams, an analyst for WTRG Economics. “It’s how the economic system works sometimes.”

And although Williams said “bandits,” he added that the Midwest refiners were simply taking advantage of a situation that gives them an economic edge.

“It’s their fiduciary duty to make a profit” for their shareholders, he said, “and they’re doing it.”

That’s little comfort for consumers, especially when a majority of them are saying in polls that gasoline prices are still hurting them economically.

The national average price for retail gasoline is $3.58 a gallon, down about 35 cents from its high earlier this summer but still 86 cents higher than a year ago, according to the federal Energy Information Administration.

To read the complete article, visit www.kansascity.com.

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