WASHINGTON -- While U.S. oil companies blame the global oil market for high gasoline prices, an Associated Press analysis of pricing suggests the run-up at the pump also comes from domestic refining, which is largely controlled by Big Oil.
In consultation with several economists, AP examined pricing trends since 1999, which it said was the beginning of the modern era of pricier gasoline. It found evidence that the portion of gasoline prices tied to refining has ballooned on its own, apart from oil, and after upward spikes, the price of gasoline drops [image-nocss] back more slowly than the price of oil.
The country's average price for self-serve regular gasoline climbed to just over $3 a gallon in July, according to the Lundberg Survey.
Crude oil accounts for just under half the price of gasoline, the government said. And oil prices are subject partly to supply decisions of foreign oil powers and stiff demand in Europe and Asia; however, a big part of gasoline pricesalmost a fifthpays refiners who make gasoline from the oil, and America's refineries have been hiking their prices, too.
Charges of refineries can be detected in what's known as their marginthe difference between what they pay for crude oil and what they collect for the gasoline they refine. Gas station costs and taxes add to the final retail price of gasoline.
In a competitive market, when raw material gets more expensive, margins typically shrink, economists say. Not so in the oil business today, said AP. Refiners have managed to fatten their margins through years of rising oil costs, it said. Since 1999, their average margin has jumped by 85%, reaching 43 cents for June, according to AP's analysis of daily data from the New York Mercantile Exchange. That margin increased by just 20% in the seven preceding years.
Rayola Dougher, who oversees market issues for the American Petroleum Institute (API), said today's 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 has announced plans to expand domestic refining capacity by at least 8% in the next several years.
In fairness, said AP, the margin rise hasn't been all gravy for refiners. Refining costs have escalated from environmental mandates, such as special gasoline blends mandated in particular places. Wild price fluctuations have added risk, and thus 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 believe that refiners have intentionally bottled up supply to buoy prices, margins and profits, said AP.
A 2002 congressional study found some evidence that it happens, but that doesn't necessarily mean refiners colluded. 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.
It's simple economics, says Severin Borenstein, director of the University of California Energy Institute. They understand that putting more supply on the market drives the price down.
Bob Slaughter, president of the National Petrochemical & Refiners Association (NPRA), blames high gasoline prices on high oil prices which are frankly out of our controlnot decisions by refiners to hold back on gasoline. But he also said, 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 now control more than half of U.S. refining capacity, and the top 10 account for three-quarters, according to an AP review of federal data. Most are petroleum powerhouses like ConocoPhillips Co., Exxon Mobil Corp. and BP PLC, which influence prices with operations across the supply chain, from drilling to pumping gasoline into cars.
Your refining businessbecause the market is more concentrated, you have far more controlis going to be more profitable, said Tyson Slocum, an energy expert with the consumer group Public Citizen.
There's another way to increase profit, AP said: Once prices are up, 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 gasoline rose an average of six cents for a 10-cent rise in oil, but dropped only four cents for a 10-cent decline in oil, suggesting that gasoline 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, said economist Richard Gilbert at the University of California, Berkeley. Slaughter suggested that 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 also suggest that gas stations may be offsetting losses they suffered earlier, when their margins were squeezed by the spiking cost of wholesale gasoline.
On the other hand, gas stations, backed by some market studies, said their skinny margins are hard to pad. It's tough, because people are yelling at you all the time, but we really don't make that much of a profit, Laura Milner, manager of an independent Falmouth, Va., station selling regular unleaded Mobil for $3.24 a gallon, told AP.
Then who would pocket downward sticky profits? Economists suspect it is more likely the businesses that set wholesale prices charged to gas stations: the refiners.Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.