Dollars & Sense

Gas prices could rise if oil industry increases exports

Updated: 2013-11-17T06:39:49Z

By STEVE EVERLY

The Kansas City Star

Drivers are enjoying the recent plunge in gasoline prices, but the oil industry isn’t. In fact, it’s thinking about exporting more gasoline to other countries, a move that could raise prices and profits.

Nationwide, gas has declined 30 cents a gallon since September, pushing prices to three-year lows. The drop in the Midwest has been even steeper. In a handful of states including Missouri and Kansas, average prices are less than $3 a gallon, according to AAA.

But the price drop, pushed by plentiful supplies, also has slashed refinery profit margins. Among those suffering is HollyFrontier Corp., which operates five refineries including one in El Dorado, Kan., that helps supply the Kansas City area.

Michael Jennings, the company’s chief executive officer and president, said earlier this month in a conference call with analysts that the company’s profit margin on gasoline wasn’t attractive “right now, and that’s our weakness.”

But he offered a solution. U.S. refineries, especially along the Gulf of Mexico, should export more gasoline, which will raise those margins in this country.

U.S. oil production has been soaring. In October, the U.S. pumped more oil than it imported, the first time that has happened in nearly 20 years.

So how petroleum exports — both oil and refined products — affect U.S. fuel prices could be getting a lot more attention.

The American Petroleum Institute is considering a push to change a law dating to the 1970s that restricts exports of domestic crude oil. The institute claims the law violates the country’s trade agreements.

Meanwhile, energy companies have been able to take advantage of a loophole in the law that allows more exports of refined petroleum products — including diesel, fuel oil, jet fuel and gasoline.

Figures for August, the latest month available, show that the export of finished petroleum products amounted to 2.6 million barrels a day. That’s about 13 percent of the refined petroleum products the U.S. uses daily, according to the Energy Information Administration.

The industry defends the exports, claiming they allow refineries to run at higher, more efficient levels instead of being shuttered. The exports also help the country’s balance of trade, job creation and economic improvement, the companies say.

But critics say the exports are increasingly being used to manage and tighten petroleum supplies in the United States. And that is raising prices or keeping them from falling as much as they would if the supplies weren’t being sent to other countries.

“There’s no question that rising levels of exports put pressure on U.S. fuel prices,” said Tyson Slocum, director of the energy program for Public Citizen, a consumer group in Washington. “We should be having a serious debate about this.”

He said the federal government, including the Obama administration, which wants to double the country’s overall exports by 2015, hasn’t taken an interest in how the petroleum exports affect retail fuel prices.

In October, HollyFrontier’s refinery margins for diesel — the difference between the cost of crude oil and the wholesale price of diesel — were triple what they were for gasoline.

Critics say that what has happened to diesel shows why there should be more concern.

Last year, the U.S. exported 400,000 barrels of gasoline a day, a relatively small number, amounting to 5 percent of domestic demand.

Diesel is a popular fuel in Europe and elsewhere overseas, and U.S. refiners have found a ready market. From 2010 to 2012, diesel exports doubled, reaching 716,000 barrels a day. That’s more than 20 percent of diesel demand in the U.S.

Diesel, which is refined from the same part of the oil barrel as heating oil, used to enjoy a big dip in the price during the summer, while the rest of the year it stayed fairly close to the cost of gasoline. That’s no longer the case. The national average price of diesel on Thursday was $3.82 and for gasoline $3.19, according to AAA.

Lee Klass, an independent trucker who periodically passes through Kansas City, paid $75,000 for the fuel in 2012 and is not getting any relief this year, paying more than $4 a gallon for diesel just last week.

“I’m not getting crunched because of the expense, I’m being strangled,” he said. “Diesel exports are creating the illusion of shortages and volatility.”

For now, declining gasoline prices are giving other motorists a break. Pump prices did bounce back about a dime a gallon as talks stalled over Iran’s nuclear program. A deal would ease sanctions and put 1 million barrels of Iranian oil back on the market.

But prices still remain sharply lower from the year’s high, freeing up some cash for the holidays. The average household with two vehicles is pocketing $90 a month compared with what gas prices were earlier this year.

Missouri and Kansas are among a handful of states with average gas prices less than $3 a gallon. Missouri had the lowest average gas price on Friday of any any state, at $2.85 a gallon. Kansas was a few cents higher because of the state’s higher fuel tax.

The question now is whether refiners will be able to find more foreign customers for gasoline, and how that will affect prices. Some think, even at current levels of gasoline exports, that we are already seeing some effect.

“I think prices would (recently) have declined more,” said Steve Mosby, a partner in Admo Energy in Kansas City, which buys fuel for retail stations. “People will be surprised when they find out about the exports.”

To reach Steve Everly, call 816-234-4455 or send email to severly@kcstar.com

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