In late June, I wrote in how crack spreads would “see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.”
Crack spreads measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.
The spreads – aka oil refiners’ profits — have soared this year as gasoline demand outstrips supply.
While surging profit margins for the makers of gasoline have opened the industry up to charges of price gouging, industry officials claim they’re producing as much gas as they can these days.
Industry capacity utilization was running at 94% as the summer began – the highest since 2018 when it hit 97%.
At the same time, a Department of Energy report also showed that 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 be stifled even if refineries were to run at 100%.
So, I wrote, with little chance of bringing new sources of gasoline online anytime soon, “the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.”
That, I predicted, “will become a growing source of agita for investors in oil companies – and other industries.” Seems I was a tad overconfident.
By Dave Allen for Discount Gold & Silver
In late June, I wrote in how crack spreads would “see more pressure as the Biden administration does everything in its power to push gas prices lower before November’s mid-term elections.”
Crack spreads measure the difference between the cost of crude oil and the prices of refined products like gasoline — and are a key contributor to both profits at oil refineries and also prices at the pump.
The spreads – aka oil refiners’ profits — have soared this year as gasoline demand outstrips supply.
While surging profit margins for the makers of gasoline have opened the industry up to charges of price gouging, industry officials claim they’re producing as much gas as they can these days.
Industry capacity utilization was running at 94% as the summer began – the highest since 2018 when it hit 97%.
At the same time, a Department of Energy report also showed that 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 be stifled even if refineries were to run at 100%.
So, I wrote, with little chance of bringing new sources of gasoline online anytime soon, “the administration's best chance to lower prices at the pump in the near term will have to come from leaning on OPEC+ to drill more oil or on refiners to accept smaller profit margins.”
That, I predicted, “will become a growing source of agita for investors in oil companies – and other industries.” Seems I was a tad overconfident.
Profits Soaring in 2022
Oil giants have made HUGE profits this year as prices and demand have soared.
Saudi Aramco, the world's largest oil company, yesterday reported a 90% increase in 2nd-quarter profits over last year, to $48.4 billion.
Competitors like Chevron and ExxonMobil in the U.S. and Shell in the U.K. have also reported record profits.
Exxon booked income of $17.9 billion in the 2nd quarter – more than three times what it earned in the same quarter in 2021. Revenue jumped to $115.6 billion from $67.7 billion a year ago.
Chevron’s performance was similarly disgusting, with their profit more than tripling to $11.6 billion as sales spiked to $65 billion compared with $36 billion a year ago.
Putin’s war in Ukraine has limited oil and gas supply from Russia, pushing up energy prices that were already skyrocketing as global demand recovered from the pandemic’s pits.
Aramco says it expects oil demand to continue to grow through 2030, despite current economic pressures.
Isabella Simonetti wrote late last month that companies said they would expand production somewhat but would also reward their shareholders with a big increase in share buyback programs.
As Goes China…
At the same time, weak economic data coming out of China yesterday sent oil prices down another 3% on demand concerns.
That news confirmed worries that China's growth is continuing to slow, although Hope King reports that markets largely shrugged off the news by the end of trading.
The People’s Bank of China surprisingly cut one of its key interest rates for the second time this year. Economist Iris Pang of ING said, “The rate cut shows the entire economy is in trouble.”
Policymakers in China are facing a number of challenges that prevent them from feeling confident about economic growth this year.
A slowdown in China, the second largest economy, will ultimately have a ripple effect on the rest of the world. Diplomatic unrest and growing conflict with the U.S. over Taiwan is only exacerbating worries.
But as Hope King points out, U.S. corporate earnings have been better than expected, and investors seem to be less sensitive to this year's series of bad economic and geopolitical news – although sentiment among U.S. consumers is way down.
With prices at the pump continuing to fall – I noticed the price marquee at one of the gas stations where I live changed three times yesterday – it’s likely the exorbitant profits will take a hit in the 3rd quarter.
But wouldn’t it be nice to see Big Oil return some of their easily-earned, windfall profits to everyday Americans in the form of even lower prices?
Yes, I dream. But perhaps a windfall profits tax dangling over their heads would provide adequate incentive.
After all, too much of a good thing for those at the top just makes income inequality all the more worse for the rest of us.