Saturday, November 24, 2012

Refinery Insights and Nonsense ala Exxon

For my day job, I’ve been thinking about gasoline prices, which means I’ve been re-reading an excellent post by James Hamilton as well as looking over data from this source. But I should also mention an interesting discussion by Ken Cohn - vice president of public and government affairs for Exxon Mobil. Let’s first focus on his discussion of the role of the refinery gross margin:
As the EIA figures show, however, refining doesn’t always produce a profit. In December, the data indicate that the U.S. market price for gasoline coming out of refineries was on average about 7 cents per gallon (-2 percent) below the refiners’ cost of crude oil alone, and before accounting for their costs of upgrading the crude into gasoline. In other words, refineries faced a market where domestic gasoline prices were very weak relative to global crude prices.
Actually operating profits equal gross profits minus operating expenses so a refinery could incur losses even when gross profits are slightly positive. But let’s not cry for the refinery as the refinery margin is quite volatile and has been very high during periods such as the one right after Katrina. It is true that the refinery margin turned negative for the last two months of 2011 as retail gasoline prices were temporarily falling as oil prices rose. The only other time the refinery margin turned negative was towards the end of Bush’s term in office when gasoline prices were plummeting even ahead of the fall in oil prices. Deep recessions will do that. Of course, we all know that gasoline prices and hence refinery margins recovered after Obama became President – a fact that Republicans reminded us of during the recent Presidential campaign. But I would never confuse Exxon Mobil with being a pure refinery:
U.S. crude oil production in 2010 was 5.5 million barrels per day. But U.S. refineries processed 15.2 million barrels of oil per day – almost three times more oil than was produced in the U.S. That means U.S. refiners, like ExxonMobil, have to purchase millions of barrels of crude oil – at market prices – to produce gasoline and other products for American consumers. For example, in 2010, ExxonMobil spent $198 billion purchasing oil around the world for its refining operations.
But their 10-K filing for fiscal year ended December 31, 2011 reads:
Divisions and affiliated companies of ExxonMobil operate or market products in the United States and most other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products.
Could some of the oil they import be produced by Exxon foreign affiliates? If Cohn is peddling the notion that Exxon’s profits were squeezed during 2011, the 10-K filing shows that the impression is incredibly wrong. Their upstream operating profits rose from $24.1 billion in 2010 to $34.4 billion in 2011. In fact their downstream profits (which include distribution profits) rose from $3.6 billion in 2010 to $4.5 billion in 2011. Exxon – like most integrated oil companies – make most of their profits from production. So when oil prices rise, overall profits tend to increase even if refinery margins take a temporary hit. Cohn’s discussion isn’t that bad despite my quibbles with it. But note that James Hamilton provides even more insights without the excuses for ExxonMobil.

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