Record gasoline prices are changing the equation of the refining business, generating unprecedented profits for the companies that transform crude oil into fuel.
For every barrel of oil they use to make gasoline, refiners are pocketing more than $30 in profit before taxes and other expenses. That is the most they have reaped per barrel since Hurricane Katrina in 2005. The major producers of gasoline in the U.S. earned about $10 billion from their refining operations domestically and abroad in the first quarter, up 50% from a year earlier.
Analysts are projecting earnings will be even higher in the second quarter, due to lower-than-normal gasoline inventories. Rising demand, a string of refinery outages and a drop in gasoline imports earlier this year curbed supplies and raised prices. Some refiners, such as Tesoro Corp., are using the cash gusher to finance upgrades. Others, such as Valero Energy Corp., the largest refiner in North America in terms of capacity for crude oil and other feedstocks that go into the refining process, are shipping the cash back to shareholders by buying back shares.
Fuel prices aren't likely to stay this high for too long. Gasoline prices and margins are expected to fall in the next few years as major refining projects under way in Asia and the Middle East, as well as refinery expansions in the U.S., help fill the growing gap between domestic supply and demand.
Hardly anyone is using the extra cash to build new refineries from scratch, says Nicole Decker, an energy analyst at Bear Stearns. "The permitting process is daunting, and there is a 'not in my backyard' mentality, which together, have stalled out proposals to build," she said.
President Bush's energy-conservation push may give refiners even less incentive to boost output in the short term. The president has proposed to increase alternative- and renewable-fuels use to 35 billion gallons a year by 2017, lessening the need for gasoline. This week, the Bush administration said it planned to substantially lift the fuel-economy standards for automobiles, another step designed to cut gasoline use.
Refiners are also reluctant to spend billions of dollars in building refineries because it would take years to recover their investment and they say they are unsure about future demand. The last new refinery in the U.S. opened in 1976. "It's a very, very cloudy investment picture," says Lynn Westfall, chief economist and senior vice president at Tesoro.