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Refiners riding high on gas prices
CBS Market Watch ^ | March 28, 2004 | Lisa Sanders

Posted on 03/28/2004 9:49:09 PM PST by Griptilian

Refiners riding high on gas prices
By Lisa Sanders, CBS.MarketWatch.com
Last Update: 3:11 PM ET March 28, 2004

DALLAS (CBS.MW) - The record prices that have clobbered consumers at the gas pump have refiners bullish on the future.

Part of the reason prices have skyrocketed is because demand is much higher than what can U.S. plants can refine, the Houston Chronicle reported Sunday. Another reason is that refiners don't have enough incentives to expend capital on expansion, despite the high profits gasoline prices will bring.

Gasoline prices could be as much as 25 cents more per gallon on average this summer compared to this spring.

Retail gasoline prices hit a record high of $1.746 a gallon for the fourth consecutive day Friday. April unleaded gasoline settled at $1.129 a gallon on the New York Mercantile Exchange. See Futures Movers.

Gas prices are adding to a turnaround that's already in progress. Refiners' stock prices hit a nadir in the fall of 2002 during a severe downturn in the industry. Ashland's (ASH: news, chart, profile) stock price is up 86 percent since hitting $24.71 on Nov. 8, 2002. Marathon Oil (MRO: news, chart, profile) hit $19 on Nov. 15, 2002 but has risen 66 percent year-to-date. Sunoco (SUN: news, chart, profile) dropped to $29 on Nov. 8, 2002, while Valero sank to $23.87 on Oct. 4, 2002. Both companies have seen their stock prices more than double since then.

As for profit, Valero's net income rose to $69.6 million in 2003 vs. $55.1 million in the year-ago period. Ashland's fiscal 2003 profit fell to $75 million vs. $117 million at the end of fiscal 2002, but fourth-quarter 2003 profit was close to triple what the company posted in the fourth-quarter of 2002.

Sunoco reported 2003 net income of $312 million vs. a net loss of $47 million for the prior year. And Marathon posted net income of $1.3 billion in 2003 vs. $516 million in 2002, with earnings from refining and marketing operations rising to $770 million from $356 million in the year-earlier period.

Marathon has since agreed to buy Ashland's 38 percent interest in Marathon Ashland Petroleum for $2.93 billion. See full story.

On Sunday, the Chronicle quoted CEO Bill Greehey of Valero Energy (VLO: news, chart, profile), the top U.S. independent refiner, as saying his company expects record earnings in 2004. Other executives were quoted as having similar expectations.

According to the Chronicle, clean-fuel requirements force refiners to spend money on compliance rather than construction. Also, sulfur extraction cuts into the amount of gasoline that can be produced from a barrel of crude.

Imported fuel had helped fill the gap between supply and demand. But environmental rules have prevented at least some of the imported fuel from being sold in the United States. There hasn't been a new refinery built since 1976 because of the cost, so companies have turned to acquisitions to boost growth.

The industry has been criticized for not adding capacity, with detractors saying the companies don't want to build new plants because they don't want to put profits at risk, the Chronicle said.

Lisa Sanders is a Dallas-based reporter for CBS.MarketWatch.com.


TOPICS: Business/Economy
KEYWORDS: energyprices; gas; gasprices; refiners

1 posted on 03/28/2004 9:49:10 PM PST by Griptilian
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To: Griptilian
Bears repeating:

According to the Chronicle, clean-fuel requirements force refiners to spend money on compliance rather than construction. Also, sulfur extraction cuts into the amount of gasoline that can be produced from a barrel of crude.

Imported fuel had helped fill the gap between supply and demand. But environmental rules have prevented at least some of the imported fuel from being sold in the United States. There hasn't been a new refinery built since 1976 because of the cost, so companies have turned to acquisitions to boost growth. The industry has been criticized for not adding capacity, with detractors saying the companies don't want to build new plants because they don't want to put profits at risk, the Chronicle said.


2 posted on 03/28/2004 9:59:52 PM PST by CedarDave (Election 2004: When Democrats attack, it's campaigning; when Republicans campaign, it's attacking.)
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To: Griptilian
>>There hasn't been a new refinery built since 1976 because of the cost, so companies have turned to acquisitions to boost growth.<<

Thank you environazis! Oh, and a big thank you for "protecting" ANWR while we're at it....
3 posted on 03/28/2004 10:00:06 PM PST by Humidston (New name for Kerry - JANE KERRY.)
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To: Griptilian
Taxes and environmental mandates are whats doing this. The construction of new refineries isn't happening, they can hardly keep up with demand.

MTBE, which is actually harming the environment, was an EPA mandate.

4 posted on 03/28/2004 10:20:14 PM PST by GeronL (www.armorforcongress.com..... put a FReeper in Congress)
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To: CedarDave
Worth Repeating. BTTT!
5 posted on 03/28/2004 10:31:43 PM PST by PA Engineer (Liberalism is a Hate Crime)
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To: CedarDave
Bttt!
6 posted on 03/28/2004 10:50:27 PM PST by Ernest_at_the_Beach (The terrorists and their supporters declared war on the United States - and war is what they got!!!!)
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To: Griptilian
btt
7 posted on 03/29/2004 3:20:21 AM PST by raybbr (My 1.4 cents - It used to be 2 cents, but after taxes - you get the idea.)
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To: Griptilian
The reason capital is not spent on new refineries is because the enviro's won't allow it.
8 posted on 03/29/2004 9:08:38 AM PST by upcountryhorseman (An old fashioned conservative)
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To: Griptilian
There hasn't been a new refinery built since 1976 because of the cost

You couldn't get a permit to build one for all the tea in China.

Another reason is that refiners don't have enough incentives to expend capital on expansion,

Not quite true. There is a double bind: You can't get a permit to build a new plant, so there is no possibility for independent investors to get into the game. And the government has ramped up regulations to the extent that the smaller, independent refiners are being squeezed out, bought out, shut down. Fewer independents means less competition. More eggs in fewer baskets means less shock absorption in the system; if a plant goes down due to a fire, or maintenance, there isn't much spare capacity in the system and the result is the sharp price spike at the gas pumps.

Some of the competition went out of the system by design. While Clinton was busy prosecuting Microsoft as a monopoly, Exxon and Mobil merged, BP and Amoco merged, BP-Amoco and Arco merged, and Conoco and Phillips merged, Shell and Texaco quietly merged their refining companies. Since then, Chevron and Texaco have merged. That makes a dramatic shift in the the petroleum market, as the space for competition narrows.

Remember, the Enron-style gaming of the market can't happen unless there is already a shortage of supply, or some other bottleneck in the system. And these bottlenecks occur when you make it impossible for anyone new to get into the game, and create in effect a government-secured monopoly.

9 posted on 03/29/2004 7:33:58 PM PST by marron
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