Gas prices up, but Mideast strife isn’t the only reason

06/19/2014 11:33 PM

06/20/2014 12:08 AM

Motorists are paying more for gas than they did a year ago, but the rise has more to do with soaring U.S. refinery profits than Islamic militants taking control of some parts of Iraq.

Oil prices have inched up but not as much as some feared they would, considering that Iraq is the second largest producer in OPEC. If its supply was completely disrupted, it would take all of the world’s surplus production capacity to replace it.

That would leave no supply cushion and probably send average gas prices in the U.S. rocketing to $4 a gallon.

But experts have downplayed the possibility of that happening.

“This is not as big a deal as it first appears,” said Jay Hakes, the former head of the Energy Information Administration.

The U.S. also has been producing more oil in recent years, which reduces the country’s reliance on imports and provides some cushion when there’s unrest overseas. But the oil companies also have been exporting more of the gasoline that’s made from that oil — and boosting their refineries’ profits.

In Iraq, the unrest has torn apart the northern part of the country. But the south, a stronghold of Shia Muslims who support the government, produces 75 percent of Iraq’s oil.

Even in the north, the Kurds, who are not allies of the Sunni militants fighting the government, have captured an oil hub and could actually boost production.

Also in the north, the Iraqi government and militants this week have been fighting for control of the country’s largest refinery. But the refinery supplies fuel only to Iraq’s domestic market.

The situation hasn’t left oil markets unfazed. The price of a barrel of Brent crude, an international benchmark, closed Thursday at $114.89, up 63 cents. West Texas Intermediate, a U.S. benchmark, closed at $106.43, up 46 cents.

The price increases since the turmoil in Iraq began have been relatively modest, ranging from $4 to $7 a barrel. That compares to a $16 jump to $108 during the unrest in Libya that led to the overthrow of Moammar Gadhafi. In 2011, that briefly sent gas prices into a tizzy.

The rise in oil prices since the start of the unrest in Iraq has contributed 10 to 17 cents to the price of gasoline. F.J. Cronenwett, wholesale manager for Robson Oil, which supplies several Kansas City area gas stations, said its wholesale prices have climbed about 12 cents since last week.

Average gas prices in Kansas City were $3.60 a gallon on Thursday, according to GasBuddy.com. They were $3.47 a week ago and $3.43 a year ago. Gas prices on the Kansas side are a few cents more because of higher state fuel taxes.

Pump prices mainly reflect the price of crude oil, but taxes and costs from distribution, marketing and refining also figure in.

And in the background this year, refineries’ profit margins have been on the rise — in part because the exporting of more gasoline and petroleum products to overseas customers pushes prices up.

“These exports tighten supplies here that could have been used to create a surplus and reduce prices,” said Tyson Slocum, director of the energy program at Public Citizen, a consumer group.

The refinery margin is the difference between the cost of crude oil and the price of wholesale gasoline. Margins have climbed 25 to 30 cents a gallon or more this year. Refiners using West Texas Intermediate oil, a U.S. benchmark, saw their margins jump 5 cents in just one day this week, to 57 cents.

Oil industry studies show that the exports create jobs and consumers benefit because refineries run closer to capacity and consequently more efficiently.

But some in the oil industry acknowledge that the exports are increasing the refineries’ profits.

HollyFrontier has several refineries, including one in El Dorado, Kan. In a conference call with analysts, an executive said the company was counting on more exports from refineries along the Gulf Coast to raise its profit margin for gasoline sold in the U.S.

In the diesel market, exports have long been an issue. Several years ago, refineries found markets in other countries where diesel was more popular. Many U.S. truckers say the diesel market hasn’t been the same.

Diesel, refined from the same part of the barrel as heating oil, used to see price declines in the summer. But with the surplus going to other countries that no longer happens. About 15 percent of diesel refined in the U.S. is now exported.

“It’s all more volatile now, and we no longer get a break,” said Lee Klass, an independent trucker who stopped in St. Joseph on Thursday.

The percentage of U.S. gasoline exported — about 5 percent — is smaller but is expected to grow.

Steve Mosby, a partner for Admo Energy, which helps fuel retailers buy gasoline and diesel, said refiners have been using cheaper U.S. crude oil to snag more foreign customers, but at a cost of tightening supplies here.

“I think the American people will be outraged by that,” he said.

Part of what is happening is coming to terms with the growing U.S. role as an energy producer. Since 2005, the country has slashed by half its net imports of oil and petroleum products. Imports now are needed to meet just 30 percent of demand.

The effect on prices is mixed, however, because as long as the country needs any imported petroleum, global prices will have a pull on what we pay here.

The situation in Iraq continues to unfold, and more bad news that could affect oil prices is still possible. But James Williams, an analyst for WTRG Economics, said this has been different from other international crises when “what if” worries sent oil prices soaring.

“So far this time oil has just traded on what has happened, and that’s unusual,” he said.

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