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The New York Times has turned into a crying rag for oil refiners. It reports that these defenseless creatures are not making as much money as they did last year. Their profit margins have dropped to an average of $12.45 per barrel of oil, down 60%. The reason? Oil prices have doubled in the last year but the refiners have only been able to raise wholesale gasoline prices by 39%.
I've posted about the problems at ExxonMobil (NYSE: XOM) and Valero Energy (NYSE: VLO), here and here. And the Times has done us a service by calculating these industry averages. It even quotes a a sobbing Lynn Westfall, the chief economist at Tesoro Corp. (NYSE: TSO), "We're just not able to pass along the increased cost of crude oil on the gasoline side." Someone hand Lynn a crying rag!
Thanks to declining U.S. demand -- it's down 300,000 barrels a day -- refiners are reacting by trying to reduce their refining capacity. That's right -- even though many people are paying over $4 a gallon for their gasoline, oil refiners are not making enough money so they are going to cut back on their refining capacity. The utilization rate has dropped from 90.4% last year to 81.4% now -- and if they take refineries off line, they can go back up above 90%.
This will give them an excuse to raise prices even more. In order for their margins to go back to "normal", I figure they'll need to charge you $5.37 a gallon. Of course, that presumes that oil goes no higher than its current $125.80 a barrel. If it hits $200, then $8.53 a gallon would be more like it.If the oil refiners get their $8.53 a gallon wish, you'll pay $171 every time you fill up -- if you have a 20-gallon tank. And then the oil refiners can toss away their crying rag. But you'll probably need to supply your own vomit bag as you watch the numbers run into the three figures.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
Reader Comments (Page 1 of 1)
1. cry me a river---------we should have known they would be babies we need to find another way to get around and QUIT using gas all together and let them suffer like other industries are----THEY DONT GIVE A HOOT ABOUT US or the American economy just their own greed
Posted at 10:08AM on May 14th 2008 by oscar2038
2. If gas gets to 5.37 this country is just going to fall apart its bad enough job market is bad and the companies that are hiring dont pay and everything is expensive. This is just corporate greed everything that is going on today.
Posted at 10:17AM on May 14th 2008 by Anthony
3. Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
He has no financial interest in the securities mentioned.
++++++++++++++++++++++++++++++++
Remind me not to send my children to Babson College.
If he had financial interests in the securities mentioned, he would be making money (like I do), instead of blogging and "teaching".
Remember the main message of "Atlas Shrugged".
When people at Valero and ExxonMobil quit one day, they will let geniuses like this author, Algore, and all the rest of the scribblers and talkers go to all corners of the world to explore for, drill for, produce, refine, transport, and market gasoline and other products.
I challenge you to do it for LESS than $3.50 per gallon...Especially when the much of the world's oil is OWNED by anti-American, anti-Western countries.
Losers...
Posted at 10:46AM on May 14th 2008 by Bernie R.
4. Do the Math. There a 42 Gallons in a barrel. At $126 a barrel, crude is costing the refiners $3 a gallon. When you add in transportation cost of crude to the refinery and gas to the retailer + the cost of refining, I don't see where refiners are making that much money. You also have to separate "pure" refiners like Valero & Tesoro from the Exxon-Mobils who do drilling and make much of their profit from the price of crude. Tesoro lost money in the 1st quarter. Valero's profits were down something like 77% from 1st quarter last year.
Posted at 3:18PM on May 14th 2008 by Dick Fritz
5. If gas prices were where they should be, the refiners would be doing us a great favor. The American public will not conserve if the price of gas were to fall. We would not be finding other means of providing energy. Just think about what $8.00/gal. would do for global warming. If there is such a thing as global warming. On the other hand the government could tax gas more and I am sure they will know the proper way to spend the windfall. I do not think that would reduce the price or increase the gas inventory. The oil refiners are not charging enough. Even though they are making less margin do you think that the gas purchasing people appreciate it. I would suggest that if your pension plan has invested in oil I would ask them to stop. The duty of a public corp. is to make a fair profit. I guess we should depend on the government to provide for our future.
Posted at 6:03PM on May 14th 2008 by dan
6. What is Peter Cohan's area of expertise : it clearly isn't oil. I don't understand what point he is making: seems to spend all his time talking about crying and vomitting. Very weak.
Posted at 8:33AM on May 16th 2008 by verysimply
7. Obviously Mr. Cohan is not an oil co. shareholder and even more obviously hs is a liberal who hates the big corporations and our military on general principle. Further he has no knowledge of the oil business. The real gougers are the various state and the federal government who wouldn't give up a penny of the numerous gasoline taxes that gives them for doing nothing more profit than the 8.3%that Exxon Mobil makes on oil sales. Exxon has to buy over half of its crude oil from overseas and has no control over OPEC pricing. Further, half of Exxon's profits come the chemicals it makes and sells.
Last year the amount of taxes Exxon paid was far greater than its total U.S. profits. Governments own or control about 75% of world oil and they are keeping U.S. oil companies from drilling in Alaska, the Continental Shelf and Gulf of Mexico as well as in Federal lands.T peckec@aol.com Eugene C. Peck.
Posted at 9:00PM on May 16th 2008 by EUGENE C. PECK