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Originally published Sunday, September 25, 2005 at 12:00 AM

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Who profits the most when gas prices rise

When the average price of a gallon of regular gasoline peaked at $3.07 recently, it was partly because the nation's refineries were receiving...

The Washington Post

WASHINGTON — When the average price of a gallon of regular gasoline peaked at $3.07 recently, it was partly because the nation's refineries were receiving an estimated 99 cents on each gallon sold. That was more than three times the amount they earned a year ago when regular unleaded was selling for $1.87.

Companies that pump oil from the ground swept in an additional 47 cents on each gallon, a 46 percent jump over the same period.

If motorists are the big losers in the spectacular run-up in gas prices, the companies that produce the oil and turn it into gasoline are the clear winners. By contrast, truckers who transport gasoline, companies that operate pipelines and gas-station owners have profited far less.

The spikes caused by Hurricane Katrina — which heavily damaged oil production and refining in the Gulf region — accentuated gains the refiners and producers already were enjoying over the past year.

Exxon Mobil, the Irving, Texas, behemoth that produces and refines oil, reported in July that its second-quarter profit was up 32 percent, to $7.64 billion. Analysts expect Exxon's profit to soar again this quarter.

The rapid run-up in prices at the pump when Katrina hit — and their slow decline — has infuriated drivers, many of whom complain that oil companies used the storm as a pretext for boosting prices and profits.

Politicians, including Washington state Gov. Christine Gregoire, echoed that sentiment and are calling for investigations of the oil industry.

But interviews with analysts, consumer advocates and participants in the oil markets indicate that typical market forces were at work in the price run-up.

Commodities markets that determine prices for gasoline moved dramatically higher after Katrina struck the Gulf region and damaged refineries and oil production. (The effect of Hurricane Rita on refiners' profits remains to be seen.)

Rising pump prices and company profits have caused lawmakers on Capitol Hill to seek legislative changes. Sen. Byron Dorgan, D-N.D., has introduced a measure that would tax some oil-company profits that are not devoted to exploration and development of new production.

"They obviously are experiencing windfall or excess profits," Dorgan said of the big oil companies. "They are ... profiting in an extraordinary way at the expense of the American consumer."

Some environmental and consumer advocates are urging the government to lower oil-company profits in another way. They want to reduce demand for gasoline, which has been growing in recent years, by requiring vehicles to get better mileage.

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Others have called on the government to set gasoline prices, as it did several decades ago.

Officials representing some oil-importing countries complain that oil companies, including those controlled by foreign governments, have not spent enough money on new exploration and development, leading to tight supplies of oil.

Consumer advocates say mergers in the refining business have diminished competition and made it easier for the companies to limit supplies of gasoline and extract higher prices.

Refiners say they are spending heavily to expand and that their industry should not face new taxes or other penalties. "Refinery capacity is being added, but the problem is that demand has outpaced capacity," said Mary Rose Brown, a spokeswoman for Valero Energy, a San Antonio-based refining company.

Hurricane Katrina shocked already-tight markets for crude oil and gasoline. It reduced oil production in the Gulf of Mexico and caused the shutdown of nearby refineries, crimping supplies of crude oil and gasoline. Traders on the New York Mercantile Exchange responded by bidding up prices for both commodities.

That influenced oil sellers and buyers who negotiate prices in an informal spot market conducted by phone and instant computer messaging. Producers cut deals with refiners to sell oil at a higher cost, pegged to the rising prices on the exchange.

For a company such as Exxon, producing a barrel of oil from an existing well costs about $20, according to analysts. When the selling price exceeds that, the increase is almost all profit, they said. After Katrina bore down on the Gulf Coast, the price of oil set a record, approaching $70.

Refiners processing the oil into gasoline faced lucrative market conditions. They may have had to pay producers more for the oil, but they were able to sell gasoline for higher prices as a result of the short supply and the spike on the mercantile exchange.

In their view, the increases were justified because the market dictated that their final product — gasoline — had risen in value.

Refiners, particularly those with most of their facilities outside the path of Katrina, cashed in. Analysts predicted a windfall for companies such as Philadelphia-based Sunoco, which continued operating normally during the hurricane.

After gasoline leaves refineries, the profit margin becomes narrower, even when prices are high. Many motorists direct their anger at gas-station owners when the higher market prices for oil and gasoline show up at the pump. But the bulk of the increases at the pump typically is not making station owners rich, analysts said.

Who sets the price at the pump depends on who owns the station. At stations owned by big oil companies, prices are based on local supply and demand and what the companies think customers will be willing to pay.

Other stations may bear the name of a big oil company but be owned locally, in which case the owner often pays a non-negotiable price for gasoline and then determines how much to charge customers.

Some of these owners say they typically charge 10 cents to 20 cents more than the price they pay for gasoline, although the amount can vary depending on competition. They say they generally do not make more money with high prices.

Station owners complain that credit-card companies are benefiting from higher pump prices. Many of those companies charge a percentage fee to the stations based on the customer's total charge. So as customers' bills rise, so do the credit-card companies' fees.

As prices have risen, station owners say, more people are using credit cards.

"It's a huge amount of money to process a transaction," said Eric Schmitz, an Exxon station owner in Fairfax, Va.

In all, companies that distribute, market and sell gasoline to the public took about 18 cents on each gallon of gas when the average price hit a peak of $3.07 a gallon on Sept. 5 in an Energy Department survey, analysts estimated. A year ago, they took 17 cents of each gallon, according to Energy Department data.

When prices rise quickly, as they did after Katrina, refineries make a larger share of the profit because they immediately pass along price increases to buyers. But gasoline suppliers and station owners typically move more slowly in passing along price increases, limiting their profit.

Conversely, as more gasoline supplies came on the market after Katrina, prices charged by refiners for their gasoline dropped rapidly. But gas suppliers and station owners did not pass those reduced prices along as quickly, a typical pricing pattern that allows them to make up for reduced profit margins when prices were rising, analysts said.

"On the way up, one guy is making money," said Michael Burdette, an analyst with the Energy Department's Energy Information Administration. "On the way down, the other guy is."

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