Who's to blame for gas prices? Not just oil companies

The Associated PressAugust 1, 2006 

U.S. oil companies blame the global oil market for high gasoline prices, but a close analysis of pricing suggests that it's not so simple: The run-up at the pump also comes from domestic refining, which is largely controlled by Big Oil.

In consultation with several economists, The Associated Press examined pricing trends since 1999, which was the starting bell for the modern era of pricier gasoline. It found evidence that:

* The portion of gas prices tied to refining has ballooned all on its own, apart from oil.

* The suspicion of frustrated drivers is correct. After moving up, the price of gasoline drops more slowly than the price of oil -- and someone pockets the difference.

The U.S. average price for self-serve regular gas climbed to a record high at just over $3 a gallon in July, according to research firm Lundberg Survey. The petroleum industry knows that many drivers are angry about record prices and profits in the industry.

In a recent TV commercial by the industry's American Petroleum Institute, a driver wonders "why world demand for crude oil determines what I pay at the pump." The industry wants Americans to know that the price of gas tracks the price of its chief ingredient, crude oil. Why? Oil prices are set on a world market, often beyond the direct control of U.S. petroleum companies.

The group has a point. Crude oil does account for just under half the price of gasoline, the government says. And oil prices are subject partly to supply decisions of foreign oil powers and stiff demand in Europe and Asia.

However, many Americans remain dubious, even contemptuous, of the industry's claims.

"It's a bunch of bull. It's just to cover their behinds," said Fernando Reas of Hartford, Conn., who was saving on gas this summer by vacationing closer to home.

Consumers are right to suspect that there's more to the story.

Almost a fifth of gas prices pays refiners who make gasoline from oil. U.S. refineries have been lifting their prices, too.

Charges of refineries can be detected in their margin -- the difference between what they pay for crude oil and what they collect for the gas they refine. Service station costs and taxes add to the final retail price of gas.

In a competitive market, when raw material gets more expensive, margins typically shrink. Not so in the oil business these days. Refiners have somehow managed to fatten their margins through years of rising oil costs.

Since 1999, their average margin has jumped 85 percent, according to AP's analysis of daily data from the New York Mercantile Exchange. In the seven preceding years, that margin increased just 20 percent.

Rayola Dougher, who oversees market issues for the American Petroleum Institute, says the current margins are helping refiners bounce back from leaner times of the 1990s. "They're still as a sector struggling, but certainly the last few years have been looking good," she acknowledged.

Refining groups say they are doing their best to bolster supplies, which would ease price pressure. The industry plans to expand domestic refining capacity by at least 8 percent over the next few years.

However, the margin rise has not been all gravy for refiners.

Refining costs have escalated from environmental mandates, such as special gas blends mandated in particular places. Wild price fluctuations have added risk and financing cost to business projects. Last summer's hurricanes also temporarily took out some operations.

But refining margins also reflect profit. Some economists and consumer advocates suspect that refiners have intentionally bottled up supply to buoy prices, margins, and ultimately, profits.

A 2002 congressional study found some evidence that it happens, but that doesn't necessarily mean refiners huddled in a back room somewhere, hatching conspiracies. They don't need to. They can each simply decide to crimp output or hoard supply. Such margin goosing is a permissible bid "to maximize their profits," federal trade investigators said in a 2001 report.

"They understand that putting more supply on the market drives the price down," said Severin Borenstein of the University of California Energy Institute.

Bob Slaughter, president of the National Petrochemical and Refiners Association, blames high gas prices on high oil prices "which are frankly out of our control" -- not on decisions by refiners to hold back on gas. But he also says, "There is no law that says you can make people in an industry invest and expand capacity."

Why wouldn't other refiners simply ramp up their own output and claim a bigger slice of unmet demand? That has become harder to do as big refiners have built up market muscle through mergers. The top five control more than half of U.S. refining capacity, and the top 10 account for three-quarters. Most are petroleum powerhouses such as ConocoPhillips, Exxon Mobil and BP, which influence prices with operations across the supply chain, from drilling to pumping gas into cars.

"Your refining business, because the market is more concentrated, you have far more control, is going to be more profitable," says Tyson Slocum, an energy expert with the consumer group Public Citizen.

There's another way to fatten your take: Once prices are up, you can keep them there.

An examination of gasoline prices relative to those of oil shows this tendency: Gas prices shoot up along with oil's -- but sputter down slowly, lagging behind drops in crude prices.

The AP analysis looked at weekly federal pricing data since September 1999. It found that a gallon of retail gas rose an average of 6 cents for a 10-cent rise in oil, but dropped only 4 cents for a 10-cent decline in oil -- suggesting that gas temporarily resisted downward shifts more strongly than oil.

Economists call the phenomenon "downward sticky" prices. "When costs go down, there's a margin there that people are happy to hold on to as long as they can," says economist Richard Gilbert at the University of California at Berkeley.

Slaughter, of the refining group, said downward sticky prices are more illusion than reality, perhaps reflecting "a human tendency to notice higher prices quicker than it notices lower prices."

However, refining groups suggest that gas stations may be offsetting their earlier losses, when their margins were squeezed by the rising cost of wholesale gas.

Gas stations -- backed by some market studies -- say their skinny margins are hard to pad.

Then who would pocket downward sticky profits? Economists suspect it's more likely the businesses that set wholesale prices charged to gas stations: the refiners.

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