Not all oil-related companies are participating in the oil boom. While OPEC sees profits continue to climb, the New York Times explains why oil refineries are getting clocked.
The problem is two-fold. First, their raw material, oil, is now significantly more expensive. Second, consumer demand is down as consumers to try to conserve. Oil consumption in the United States fell 3.3 per cent in March (year over year). This fact has meant lower production rates for oil refineries.
Interestingly, although people complain daily about sticker shock at the gas pump, gas prices have not kept pace with the oil rise. Oil prices have doubled over the past year while gasoline prices have only increased roughly 39%. The margins for the oil refineries have therefore been eaten away. The average margin on a barrel of oil is now $12.45, 60% less then a year ago. With smaller margins and less production, oil refineries that are not part of large integrated companies are suffering.
While conglomerate Exxon Mobil (XOM) posted large profits because of their oil sales, companies such as Tesoro (TSO), Sunoco (SUN), and Valero (VLO) have been clobbered.
What could reverse this trend? A drop in oil prices or an increased ability to pass high prices through to consumers. Of these, the first seems more likely. Although the US economy is doing surprisingly well given the collapse of housing and skyrocketing commodity prices, it’s hard to see how consumers will start viewing $4 a gallon as a no-never-mind.