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Refinery Profit Margins May Be Fueling Uptick At Pumps

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The Associated Press

The Tampa Tribune

Published: January 17, 2009

HOUSTON - You may do a double-take as you pass your local gas station. Chances are, the price you pay at the pump has jumped markedly in the past couple of weeks, even as crude prices have fallen.

The average national price for a gallon of unleaded gasoline rose seven-tenths of a cent overnight to $1.799 - well below the $3.05 average of a year ago but up nearly 14 cents in the past month, according to AAA auto club, the Oil Price Information Service and Wright Express, a company that tracks transportation data.

At the same time, the price of crude - which accounts for about 60 percent of gasoline's cost - has been on a steep decline. Oil futures tumbled to below $34 a barrel Thursday after trading as high as $50 a barrel just 10 days ago.

When oil made its extraordinary fall in recent months from a record high of more than $147 a barrel in July, gasoline followed suit. Why not now?

Why aren't gas prices falling at my local service station right now?

Although oil and gasoline prices often move in the same direction, there's usually a lag between crude's decline (or rise) and that of gasoline.

Analysts say the ongoing uptick in gasoline prices is likely tied to oil's sharp rise at the end of last year, when fighting between Israel and Palestinian militants raised concerns about supply disruptions in the oil-rich Middle East.

If that's the case, now that oil has retreated to below $40, shouldn't gasoline get cheaper?

It should - and it might - but other factors are at play.

For one, the companies that process crude into products such as gasoline are sharply cutting production, in part because of falling demand. Less production means less supply, which tends to push prices up.

The gasoline producers are trying to make some money in the wake of a dismal 2008. When crude prices were so high in the first half of last year, refining margins - the difference between what refiners pay for crude and what they get for products they make from oil - were dismal. In the latter half of the year, margins improved as oil prices receded, but refiners continued to struggle because people were simply driving less and buying less gasoline.

But doesn't that mean refiners simply are inflating the price of gasoline?

That's the opinion of the nonprofit group Consumer Watchdog, which tracks the industry and has called for greater regulation of refineries.

Consumer Watchdog says production cuts at California refineries, for example, far exceed the drop in consumption.

"The refinery cutbacks are for purely financial reasons," said Judy Dugan, the organization's research director. "Now is the time for government to insert sharper oversight and regulatory controls."

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