Jun 23, 2022 - Politics & Policy

Oil refiner execs head to White House amid soaring profits, record gas prices

Data: U.S. Department of Energy, FactSet; Chart: Axios Visuals
Data: U.S. Department of Energy, FactSet; Chart: Axios Visuals

Crack spreads — a proxy for the profits oil refiners pocket — have soared this year as gasoline demand outstrips supply,

The big picture: These spreads measure the gap between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refiners and to the prices we pay at the pump.

  • Crack spreads could come under pressure as the Biden administration does everything in its power to push gas prices lower.

State of play: Shares for major oil refiners got clobbered yesterday, ahead of a meeting between Energy Secretary Jennifer Granholm and top industry executives at the White House Thursday.

  • Marathon Oil fell 7%, Phillips 66 dropped 6%, and ConocoPhillips tumbled 6%. Chevron and Exxon both fell about 4%.
  • President Biden publicly urged an increase in gas production, saying bluntly, "I'm calling on the industry to refine more oil into gasoline and to bring down gas prices."

Yes, but: Earlier this year, as crack spreads soared, so did the stock prices of major American refining companies. They're up an astonishing 38% since January, even as the overall market entered bear territory.

  • The chart above shows the so-called 3:2:1 crack spread, thought to be the best benchmark of margins at refineries (it assumes three barrels of crude are turned into 2 barrels of gasoline and one barrel of diesel, or jet fuel).

The intrigue: While surging margins for gasoline makers opens the industry up to charges of gouging, industry officials argue that they are producing as much gas as possible.

  • Industry capacity utilization is running at roughly 94% currently, the highest since 2018 when it hit 97%.
  • A recent government report also showed overall refining capacity has fallen in the last two years. In fact, it's now back down to where it was in 2014, meaning that supply would remain strained even if refineries were running at 100%.

The bottom line: With little chance of bringing new sources of gasoline online anytime soon, the administration's best chance to lower prices will likely come from leaning on refiners to accept smaller profit margins.

  • That's an unpleasant prospect for shareholders and the source of some consternation for investors in oil companies.
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