Where are gas profits going?

by Carol Elliott

06-09-05

At the Phillips 66 station at 1807 Lincoln Way East in South Bend, regular was selling for $ 3.19 per gallon, the same price most area gas stations were asking.

Sherry Lovitt of Mishawaka clutched $ 15 in one hand and pumped gas into her 1999 Kia Sephia with the other.

"I'm putting in what I can. I'm not sure it will fill it up." It didn't come close. Lovitt blinked and the gauge cruised over $ 15.
"I'm not going as many places," said Lovitt, who is an accounting student at Brown Mackie College in South Bend. "It will make a difference in what I have extra."

With fill-ups emptying wallets to the tune of $ 50 and more, stunned consumers were getting a quick economics lesson concerning the law of supply and demand. For more than a year, oil and gas prices have ramped higher as worldwide demand for petroleum products put pressure on tight supplies. Then Hurricane Katrina made the long-dreaded $ 3 mark a mere speed bump on the gasoline price highway.

But while consumers are paying, who is profiting from high gas prices?

"Not me," said Jason Long, who paid $ 23 for a partial fill-up for his 1994 Ford Explorer at the BP station on Bremen Highway in Mishawaka. "The economy, basically. Not us. We're the ones who have to work for a living and it's hard to do that."

But if consumers are paying big money for gasoline, it only makes sense that someone is benefiting.
Who?

Oil companies.

The most obvious answer as to who is making money off high gas prices is the companies, said Robert A. Robicheaux, professor of marketing at University of Alabama at Birmingham, who has studied the oil industry for 20 years.

In 2004, the nine largest integrated oil companies made $ 87 bn in profit, with ExxonMobil alone making $ 25 bn, according to an August report by the Congressional Research Service. This year, ExxonMobil reported profits jumped 32 % to $ 7.6 bn in the second quarter compared to the same period in 2004. BP saw a profit increase of about 30 %, totalling $ 5.6 bn in the second quarter, while ConocoPhillips earned $ 3.1 bn, a 55 % increase in profits in the second quarter compared to the same period in 2004.

The high profits are mostly driven by high crude oil prices, which jumped more than 60 % in 2004, according to the congressional report.

Crude oil is primarily pushed by very high global demand, particularly from China, which in turn has fuelled investor speculation in the market, said Robicheaux.

"That really is not the oil companies' fault."

"We have made money on crude oil," said Linda Casey, spokeswoman for Marathon Ashland Petroleum of Findlay, Ohio, which has about 340 Speedway stores in Michigan and 250 in Indiana.

"But people don't look at how expensive it is to fund oil exploration and produce gasoline," said Casey. "They also are not looking at the fact that the business is very cyclical."

In fact, in the 1990s, many oil companies had a hard time making profits and supply was greater than demand. Exploration came to a standstill and refineries were shut down. Casey also pointed out that profits are being ploughed back into refinery operations and maintenance in order to ensure reliable flows of gasoline in the future.

The congressional report suggested windfall profits are not necessarily bad. They can benefit the consumer in the long run if oil companies are using the profits to return dividends to shareholders and make capital investments, particularly in refinery operations.

Lack of refinery capacity has been widely blamed for gasoline volatility in recent years, with no new refinery being built since the 1970s. However, the congressional report said oil companies are holding record cash balances, engaging in mergers and acquisitions and investing in a variety of energy related projects, although the projects were not necessarily oil.

Building a new refinery is the most costly way for a company to expand its capacity, according to the report. An oil company is more likely to invest in import operations or expansion of existing facilities.

When asked who she thinks is making money from high gas prices, Lovitt, the college student, nodded her head towards the Phillips 66 store.

"The owners," she said. "They see something happen and they take advantage of it."

"They all think that," said Jeff Lenard, spokesman for the National Association of Convenience Stores, referring to gas customers. But most station owners, particularly independents, lose money on gasoline and try to make up profit elsewhere in their operations, said Lenard.

The Alexandria, Virginia-based association represents about 111,000 stores, with about 4 % owned by major oil companies.
"(Station owners) are the messengers," said Tom Kloza, chief oil analyst for the Oil Price Information Service in Lakewood, NJ.

The exception is when the station is owned by an integrated oil company, said Robicheaux.

"They (oil companies) set the wholesale price at which gas is sold to the retailers," he said. "But as station owners, they also get to set the retail price."

They might lose money in retail sales, said Robicheaux. "But they've already made a huge profit on their refinery operations and wholesaling to their own stations and independents." A high level of mergers and acquisitions in the 1990s has also resulted in fewer major oil companies, said Robicheaux. "So it's a whole lot easier for them to avoid what they might call destructive price competition."

“They are making money hand over fist," said Lenard of the convenience store group.Credit card companies win twice, said Lenard.

More people are being forced to charge gas purchases because their budgets won't bend to cover $ 3 per gallon costs. In 2004, about 54 % of gas transactions were paid by plastic. This year, Lenard expects the number to easily top 70 % -- and that projection was made with gasoline in the $ 2.60 range.

Also, most credit card companies charge the station a 3 % fee to handle transactions. Three % of a higher number, without higher expenses attached, means significantly higher profits, said Lenard. For station owners, the fee means another bite out of their margins.

"You actually see some retailers encouraging cash discounts," said Lenard. "This is indicative of how much pain it is causing gas retailers."

Some credit card companies are offering rebates on gas purchases.

"It takes away some of the sting," said Greg McBride, senior financial analyst with Bankrate.com. "The design is to build customer loyalty by getting someone to use the card for purchases they make day in, day out."

McBride disagreed that high gas prices have made for a killing for credit card companies.

"Revolving debt has doubled in the last 10 years. This is not something we can pin on the increased gas prices in the last year."

In Indiana, the price of a gallon of gasoline includes a 6 % sales tax, as well as an 18-cent state excise tax and an 18.4-cent federal excise tax. Michigan charges a 6 % sales tax and a 19-cent excise tax, in addition to the federal tax. The sales tax is applied to the base price of gasoline before the excise taxes are added on. At $ 3 per retail gallon, motorists spend about 16 cents on sales tax.

An Indiana lawmaker proposed suspending the sales tax for 90 days. The idea was rejected by Gov. Mitch Daniels because it could cost the state more than $ 46 mm at a time when the state's budget is facing a projected deficit of $ 172 mm by 2006.

The Indiana State Budget Agency is reviewing whether gas consumption is rising and whether the state is getting a windfall from higher prices.

A Michigan lawmaker has also proposed a bill that would eliminate the sales tax on gasoline sold above the $ 2.30 a gallon mark, but prospects for its passage are not favourable.

Consumers seem to have the biggest "L" for loser pasted on their foreheads when it comes to gas prices. American consumers spent an additional $ 105 mm per day in 2004 for gasoline compared to 2003, according to the congressional report. The spending has cut into family budgets to the point that even Wal-Mart blamed gas prices for missing its second-quarter earnings target.

"Transportation costs are typically a big part of a consumer's budget," said Amanda Wellington, manager of credit counselling service GreenPath Debt Solutions, which has area offices in Elkhart and Mishawaka.

The high gas prices mean consumers have to cut down elsewhere -- entertainment, eating out and other activities, said Wellington. But if consumers are really, really forced to look at the bright side, higher gas prices may finally force some changes in behaviour.

"Hopefully, it will create an awareness for the necessity to budget," said Wellington.

The high prices might also spur consumer moves -- finally -- to energy conservation, such as carpooling and driving more fuel-efficient vehicles.

Source: Tribune