US Oil Refiners Tell Congress Not Fixing Fuel Cost

yahoo ^ | May 11, 2006 | Tom Doggett

[kellynla]

U.S. oil refiners are not conspiring to keep gasoline prices high and are not overcharging consumers for motor fuel, the industry's trade group told Congress on Thursday.

Under pressure to do something about soaring fuel costs, President George W. Bush has ordered federal regulators to investigate whether oil companies and refiners are collecting excessive profits from gasoline prices that top $3 a gallon in many parts of the country.

"Allegations of refiner price-fixing, price-gouging and other illegal pricing practices are patently false," Bob Slaughter, president of the National Petrochemicals and Refiners Association, said at a House committee hearing on gasoline costs.

Slaughter told the House Energy and Commerce Committee the refining industry had been subjected to dozens of investigations in recent years by federal and state agencies when gasoline supplies were tight, and in each case the industry was cleared of wrongdoing.

The FTC is scheduled to send Congress a report by next week on the agency's latest probe of high gasoline prices and possible refinery constraints. The report was mandated by Congress last year.

Red Cavaney, president of the American Petroleum Institute, also defended the business practices of its big member companies.

"We condemn price gouging," he told the committee.

The price of crude oil, which in the U.S. market was again above $70 a barrel, accounts for about half the cost of making gasoline.

"Oil companies do not set the price of crude oil," Cavaney said. "It is bought and sold in international markets, and the price paid for a barrel of crude oil reflects the market conditions of that day."

Strong global oil demand, especially from growing economies in China and India, and market concerns about possible future supply disruptions linked to the West's dispute with Iran's nuclear program, were helping to keep crude prices up.

[SAJ]

Fine analysis, and, nearly as I can tell, spot on! Been an energy trader for decades, and as you perfectly well know but some of our colleagues here do not, A) expanding refining capacity simply cannot be done immediately, and B) the time frame for expanding capacity has become more or less totally dependent on politics, not economics.

Best wishes and FReegards!

Psssst...got any unused 'conspiracy' theories that I can sell on e-Bay?...

;^)

[Michael.SF.]

that still leaves a wide margin for profit, or gouging.

So Profit = gouging?

Let me ask this, how much money, per gallon of gas are you allowing to cover the cost of the expansion projects that I have previously mentioned?

If a refiner spends $400,000,000 for an expansion, what is the rate of return you will allow for on that investment, and how many years are you allowing for capitol recovery?

Without answers to those questions you cannot equate profit to gouging.

[Michael.SF.]

that schedule assumes that you can get your permits in a timely fashion and that your firm has ready access to a few hundred million dollars

Yes, agreed, I have made some assumptions. But I am referring to expansions at existing refineries. Grass roots refineries are a far different animal. The only grass roots refinery I am aware of, in the USA, is the project in Yuma, Az. which has been around for at least 3 years, maybe more like five. They have just recently been permitted. Construction may begin in 2007, more likely 2008 (if they get funding).

Other grass roots projects in Mexico, Canada and Chile may very well end up exporting their gasoline to the USA.

[Michael.SF.]

thank you.

[defenderSD]

The same thing has happened here in Arizona. I calculated out the increase in the price of crude oil over the last three months and the usual increase in refining margin between Feb and May that I figured out during the last two years. That only brought the price to about $2.90 per gallon, yet regular unleaded is selling for about $3.07 here in Phoenix. So there's about another 15-20 cents per gallon of cost that's been added to the price of gasoline this year, which I think is caused by: 1) increased costs of adding ethanol to the gasoline at 10% of total volume, including about 5 cents per gallon from the 52 cents per gallon ethanol tariff, and 2) another 1.5 cents per gallon in state and local sales taxes on the higher price. So about 90% of the extra cost this year is because of the new ethanol requirement, which reportedly actually increases air pollution compared to pure gasoline. Use of ethanol does reduce our dependence on foreign oil to some extent, although a lot of water is used to grow the crops and a lot of electric power from nuclear/coal/natural gas is used in ethanol refining.

So we are getting hit harder than usual at the gas pump this year because of the new ethanol requirement. Perhaps we need to use ethanol to become a little less dependent on imported oil, but we don't need the 5 cents per gallon tariff on ethanol. That tariff exists entirely to improve the profitability of US ethanol producers, which will tend to increase investment in ethanol production. The question is whether investment would be adequate without the tariff, and I think there probably would be plenty of investment without the tariff.

[Smokin' Joe]

You are doing a great job of explaining the refining bottleneck, but do not leave ethanol out of the equation.

With the demise of MTBE as an oxygenating additive and the Congressional call for the increased use of ethanol, the projected 2006 demand exceeds the projected domestic ethanol supply by roughly 1.5 billion gallons.

There is a $.54 per gallon tarrif on ethanol.

That is without even going into the differences in handling a hygroscopic fuel additive versus MTBE, or the lower mileage from ethanol fuels, all of which mean that consumers will ultimately pay more.

Thank the nice folks in Congress for another SNAFU.

[defenderSD]

Generally I agree with you and if you're a regular reader here at FR you know that I'm a staunch supporter of the free enterprise system. But there is one executive in the refining industry who has said a couple of times: "no new refineries will be built in the US in this decade." I find that statement just a little suspicious. Why is that guy so sure that no new refineries will be built? Meanwhile, there's a company that has obtained the environmental permits to build a new refinery near Yuma and yet they can't find investors to finance the project. There's an issue with securing oil supplies for the new refinery for the long term, and I don't know anything about the expected ROI on the new refinery. So I don't know if there's anything unusual about the lack of investor interest so far.

There's no question that oil production is an extremely fragemented and competitive world industry with hundreds of producers, and no company has enough market share to manipulate the price of oil. But the refining industry is more concentrated, with about 15-20 refiners operating in the US. It's essential for fair competition that the current refiners don't do anything to interfere with the construction of new refineries. I'm going to be following the news on this Yuma refinery closely to see if the company finds investors and if not why not. That's a good location for a refinery and I can't think of a good reason why it shouldn't be built.

[defenderSD]

Yes, Hannity gets annoying with that repeated statement that "no new refineries have been built in 30 years", while he fails to mention the expansion of existing refineries. As long as there is no collusion between refiners and no interference in expansion and new construction projects, the free market system will provide enough refining capacity for the US within another 5-8 years.

[jonrick46]

Thanks for your regards!

A conspiracy theory I heard once on Coast to Coast with George Noory (that remote viewing radio show that reads Tesla coil vibrations to predict the future):

The Russian government used some type of energy force to steer Hurricane Katrina through the heart of our energy production system at New Orleans. This effort was to destabilize the United States economy.

I wonder how many of my fellow Americans would take that walk down the Santa Monica Pier to catch a ride on the Mother Ship (a reference to the Heavens Gate people) if I told them it was their only chance to escape global warming?
Heh heh!

[Michael.SF.]

So I don't know if there's anything unusual about the lack of investor interest so far.

I do not know about the lack of invester's in the Yuma project, but I do know that there are two other projects in process, which I believe may be related to Yuma.

The first is a pipeline project which runs from Texas Gulf region through Yuma to Los Angeles. This project is to carry gasoline. The second is a ship unloading terminal in Wilmington, which is to ship crude from Wilmington to ??

Both of these projects are in phase II engineering and are approaching procurement. It is possible that w/o thses projects Yuma does not have a inlet for the required crude nor an outlet for finished product.

[LaineyDee]

I say we rescind their salaries and keep them from gouging the American taxpayers with these useless "investigations".

[Wristpin]

"yes I know there issue in refining capacity but is that the current issue driving price?"

The dealer added cost is the fear premium added by the speculators for any number of mythical future reasons... The US may attack Iran, Nigerian rebels, hurricane predictions, or some guy may change his motor oil 100 miles early. They need to be going after at the "Peak Oilers" who have engineered the price of crude artificially high, not the people doing the work.

[traviskicks]

Earlier I suggested having the oil companies hold hearings and dragging in Senators and Congressmen and all the criminals in government and put on some bright lights and cameras and interrogate them until the public knows whats really been going on. :)

[LaineyDee]

Sounds like a PLAN! :)

[SAJ]

Let's get a couple of things straight. You don't invest your capital without the assumption or expectation of a positive return, and preferably a nice one, right? Fine. Me, too.

And oil/refining companies are no different.

Refining has been for decade -- up until about 2 yrs ago, as a matter of fact -- an absolutely rotten business proposition. 2-3% historical net margins? You and I wouldn't look at such a proposition for a moment, now would we? And these are on refineries already built.

Now, consider. To build a refinery, ground-up, today, a company must do all the ordinary things: gather capital, acquire property, draw up construction plans and have them approved by sundry agencies, set up contracting arrangements.

THEN comes the fun part. From well before construction begins right through to the date that operations commence, the company must endure any number of shotgun lawsuits over anything, any subject at all, that the envirowhacko socialists can get any judge to listen to. Then, postulating the company's success in court, the company will get to go through unending appeals. The environazi crowd understand the cost of capital perfectly well; they don't need to win, really, just to be able to guarantee an indeterminate delay into the future. And the legal 'system' is all too willing to accommodate them in this.

I won't even go into the problems the envirowhackos can and do cause energy companies after a new facility begins operation.

All around, it's a lousy deal, and it is in no way surprising that one or another exec said that there won't be any new refineries built (in the US) in the next decade. I'd be perfectly willing to wager that, absent a sea change in public consciousness -- not knowledge; first one must be conscious before one can acquire knowledge -- regarding the energy industry, there won't be a new refinery built in the remainder of my life, which I fancy will be considerably longer than a decade. Nothing conspiratorial in this at all, merely undiluted practicality.

If the Yuma project lacks for investors, this too is hardly surprising. Relative to any number of other investments one might consider throwing a billion-plus dollars into, a refinery simply stinks -- no pun intended.

[SAJ]

No need to work that hard, mate. Just check the board. Front-month RBOB is fully 20 cents over RFG II, basis New York Harbor.

There's your differential right there.

[defenderSD]

"Front-month RBOB is fully 20 cents over RFG II."

Please explain your terminology and what you're trying to say here. I'm not a commodity trader. I'm an independent software consultant and a stock trader.

[defenderSD]

"Relative to any number of other investments one might consider throwing a billion-plus dollars into, a refinery simply stinks."

Not necessarily. ROI depends on the size of the capital investment, monthly refining volume, and future refining profit margins per gallon. Last I heard, Arizona Clean Fuels Inc. already has the environmental permits from the state and EPA and while no doubt some NIMBYs will sue them when they start construction, the litigation should be manageable here in AZ. The west coast is another story; I wouldn't attempt to build a new refinery out there.

[SAJ]

Look, mate, I've no problem with you, but if you don't even know the fully industry-standard terms RFG II and RBOB, why the devil should anyone even listen to you, eh?

RFG II is and has been for years the term for standard-blend, ReFormulated Gasoline, second version. It's traded on NYMEX, ticker symbol HU, one deliverable contract each month (this, btw, is NOT usual in the futures markets -- soybeans are only deliverable in 7 assorted months and coffee in only 5, and any given currency vs. USD in only 4).

I'm not a carpenter. I'm not an ordnance expert, nor do I know anything about hand weapons. I'm not a physicist, except incidentally and as regards very specific topics. I'm not an actor, nor a photographer. I know next to nothing about the mechanics of automobiles. I'm not Martha bloody Stewart; I couldn't make a place-setting decoration to save my life.

I am a trader. More specifically, I am a trader in energies (and other mkts, to be sure). To this end, it is necessary to have, and I have, acquired the appropriate and not particularly difficult knowledge of industry-specific terminology necessary to understand (more or less, insofar as can be understood by anyone not actively employed in the industry) what the bleep is going on. This process takes a few years, as I assume you would readily believe.

I do not opine on carpentry, physics, any of the excellent gun threads here, nor car threads. Why? Because I know that I don't know what the bleep I would be speaking of.

Here's a thought. If you DON'T KNOW what is utterly industry-basic, standard terminology. and you haven't the initiative required to find it out on your own effort, then -- just maybe possibly -- you might find it to your advantage to AVOID opining on said industry and sounding like a bloody effing moron. Just a thought.

Possibly a valuable notion for you, who knows. BTW, I've designed assorted computer systems AND written the software for them since 1969, so don't wave the flag of 'independent consultant' at me. As we used to say, for years -- ''I piss on independent consultants in assembler.'

Do have a nice day, won't you please! RBOB, ticker symbol RB, is the convenient abbrev for ReBlended gasoline, meaning specifically with ethanol. The HU contract will be extinct come January or February 2007. I could look up the exact date of extinction right now, but, frankly, it's not worth the click; NYMEX' site is horrible, badly designed, overly graphic-heavy, inefficient as regards requiring loading unnecessary pages in order to obtain a result, and slow beyond belief. Unquestionably designed by 'consultants' and a committee.

Don't know about you, mate, but I do all my own research, especially including definitions that are important regarding one or another mkt. It works out better.

Good trading to you!

[SAJ]

Not necessarily. ROI depends on the size of the capital investment, monthly refining volume,...

Well, sir, whatever you say must be Gospel. Sorry, but I haven't time enough to comment on that remarkably ill-informed -- hell's bells, outright stupid -- sentiment.

Good luck to you in trading. You'll need it.

FReegards!