Why oil chiefs are feelin' groovy
By Julian Delasantellis
In 1980, Paul Simon sang of a "One Trick Pony", an animal that "does one trick only - it's the principal source of his revenue". These days, the world's major oil companies are a lot like this animal. They do one thing - engineering price rises by restricting gasoline supply through manipulation of oil-refinery output - really, really well and, much like the pony, they make lots and lots of revenue from this activity.
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Not on your life, as all US drivers know. Like vampires, they now fear each new rising of the sun, for it is then they will learn just how much retail gasoline prices have risen overnight. According to the US Department of Energy's Energy Information Administration (EIA), average US retail gasoline prices have risen every week since early February. The national retail average of US$2.876 for a gallon of regular gasoline (75.98 cents per liter), as of the April 16 report, is the highest price since the historical twin peaks of just under $3.10 early last summer and just after Hurricanes Katrina and Rita in the early autumn 2005. The national average masks wide regional disparities; lower in the Midwest, but on the west coast, the average is already at $3.195 (84.4 cents a liter).
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You could see the workings of the oil companies' trick as it developed. In early January, refinery capacity utilization stood at a healthy 91.5%, and the gasoline crack spread, the crude-oil-to-gasoline price ratio (the crack spread is explored in depth in my April 4 article) that defines the profit to be made from refining crude oil into gasoline, stood at a fairly low $7.154. NYMEX gasoline futures were then trading for less than $1.45 a gallon, the lowest prices for more than a year. It was then, with US gasoline demand still very strong, that the reduction in refinery capacity utilization began; all of a sudden the financial press was full of stories related to various and sundry "accidents" and "repairs" that were causing US refineries to shut down and/or limit production.
By late March, as the Iran/UK crisis began, and as crude-oil supplies at Cushing began to build, NYMEX gasoline futures had risen to $1.95, and the crack spread was near $19, meaning that oil companies were making just under two and two-thirds times the profit on every gallon of gasoline sold that they had in early January. On April 13, gasoline futures topped out at more than $2.20, up more than 75 cents since January. On that day, the crack spread stood at just under $28, meaning that the business of refining oil into gasoline was now four times as profitable as it was just three months previously.
Therefore, is it any surprise that the oil companies have now decided that all those needed "repairs" and "maintenance" can be put off for a while? The most recent report released by the EIA shows that oil refinery capacity utilization now stands at 90.4%, up 5 percentage points from two months previously.
