Soaring cost of gas has both drivers, oil firms up in arms
www.miami.com Posted on Tue, Feb. 25, 2003 BY PATRICK DANNER pdanner@herald.com
As oil prices go, so goes the oil industry. And with oil prices surging to their highest levels in at least two years, oil companies are poised to reap rich profits.
''When prices rise, it looks like they're coining money,'' says Craig Pirrong, director of energy markets for the University of Houston's Global Energy Management Institute.
A comparison of oil prices and the bottom line of some major oil companies shows that the industry generally racks up greater profits when prices are at or near their peak. Earnings tend to tumble when oil prices bottom out.
The oil and gasoline industry is sensitive to the topic, particularly now. Tempers have been rising right along with prices at the pump.
The automotive club AAA, raising the possibility of gouging, has called current gas prices unjustified.
Florida Attorney General Charlie Crist has called for federal authorities to investigate and is scheduled to meet today with the representatives of six oil companies.
Connecticut Sen. Joseph Lieberman, a Democratic presidential candidate, asked the energy secretary on Monday to look into the recent rise in gas prices.
Within the last week, according to AAA, drivers in South Florida and throughout the state have paid historically high prices -- $1.729 in Miami, $1.723 in Fort Lauderdale, $1.696 statewide -- for regular gasoline.
But while the oil industry acknowledges the connection between prices and profits, it insists the link does not tell the whole story.
''Industry critics chastise oil companies for gaining what they claim are unconscionable profits,'' the American Petroleum Institute, which represents the industry, says. ``The truth is, however, that industry profits have been very much in line with those of other industries. And often they are lower.''
Last week, oil prices topped $37 a barrel, their highest level since the last half of 2000, when a barrel of light sweet crude cost as much as $37.20. Before that, oil prices had not reached such levels since late 1990 -- when the United States was last on the verge of war with Iraq.
During these periods, oil companies registered some of their biggest earnings.
''The price of oil and other energy commodities are inherently volatile,'' Pirrong says. 'There's a direct linkage between [companies'] financial performance and the price of oil and energy commodities, [and it] inherently generates volatility in their financial performance and earnings.''
The price of a barrel of oil is trading high for a variety of reasons, says Rayola Dougher, a senior policy analyst with the American Petroleum Institute.
Among them, she says, are the following:
• Venezuela, a significant source of oil, has been coping with a strike that has reduced exports to the United States.
• Oil inventories are at their lowest levels since 1975.
• The cold winter through much of the United States has increased the demand for heating oil.
• Jitters about possible war with Iraq have traders bidding up prices to secure supplies.
DOUBTS REMAIN
AAA is unconvinced.
''It's difficult to understand . . . why the price has gone up so steeply,'' says Geoff Sundstrom, a spokesman for the Orlando-based auto club. ``No oil tankers have been sunk; refineries are operating; oil is flowing.
''We are not trying to be harsh on the industry,'' he says, ``but we did feel the big increase after the State of the Union address seemed to be based on fear and speculation.''
Sundstrom says there is an almost instantaneous increase in gasoline's wholesale price when the price of crude rises. The oil companies attribute that to their need to anticipate inventory-replacement costs, but, Sundstrom says, ``the problem with that is we don't see an immediate drop in gas prices when the price of crude oil goes down.''
Dougher counters that current gas prices are nowhere near historical highs. Adjusted for inflation, she notes, a gallon of gas in 1981 would cost $2.71 in today's dollars.
''I don't know why AAA does this,'' she adds. ``Every time the price goes up, they do this. Maybe they think it keeps their constituents happy. They're just not dealing with the facts.''
According to Dougher, a close look at oil companies' profit margins (net income divided by sales) shows the fuel industry's profits lagging behind those of U.S. industry as a whole over the last five years. Citing data from BusinessWeek, she says the fuel industry's profit margin has been 4.7 percent, compared with 5.2 percent for all U.S. industry.
PROBE DEMANDED
Nonetheless, the price jump has fueled calls for investigations into why gas prices are rising and possible manipulation or gouging.
Last week, Crist sent the Federal Trade Commission a letter, requesting that it look into the increase.
On Monday, Lieberman urged U.S. Energy Secretary Spencer Abraham to investigate.
When gas prices skyrocketed in the West in 2000 and in the Midwest a year later, the FTC investigated and reached the same conclusion.
''In both cases,'' FTC spokesman Mitch Katz says, ``the commission did not find that illegal anticompetitive behavior or collusion had led to the price increases.''
Adds Dougher: ``The FTC . . . [has] done numerous investigations over the years and . . . never found any anticompetitive behaviors. What [it has found is that] market forces are determining the price of gasoline.''
HUMAN NATURE
When oil prices are high, oil companies typically see profit gains in exploration and production (referred to as ''upstream'' operations). The reason is simple: The crude taken out of the ground is more valuable.
But profits from the downstream operations of refining and marketing -- from the making of products from crude, that is, and from those products' sale to consumers -- typically tumble. That's because the price of a barrel of oil will have climbed.
'When oil prices rise, more often than not but not always, refiners' margins tend to be squeezed,'' says Jon Rasmussen, a financial economist with the Energy Information Administration, the statistical arm of the Department of Energy.
Take ChevronTexaco. In the fourth quarter last year, when the price of a barrel of light sweet crude averaged $28.23, the San Ramon, Calif.-based company's exploration and production operations generated more than $1.2 billion in operating earnings, up from $544 million in the same period in 2001, when the price of oil averaged $20.53 a barrel.
But ChevronTexaco's refining, marketing and transportation operations lost $151 million in the most recent quarter, compared with a $215 million profit over the same period a year earlier.
On the other hand, downstream operations generally do well and upstream operations falter when oil prices tumble. When prices fell to $12 a barrel in late 1998, some of the major oil companies' profits declined.
Low oil prices, however, rarely spark debate.
''These things,'' Pirrong says, ``get the most attention when prices are high.''